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Column : Will carbon prices recover?

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SummaryPrices of European carbon permits are 7 euro/tonne, down by 8 euros from November 2008.

Emissions in 2012 and 2013 are not expected to change significantly. Carbon credit surplus in 2013 could be 2 billion units

Prices of European carbon permits are 7 euro/tonne, down by 8 euros from November 2008. Certified emission reductions (CERs), or carbon permits from developing countries, traditionally follow European Union Allowance (EUA) prices and trade at a discount of 0.5-1 euro, although this spread has increased significantly over the last year. As of November 26, 2012, these developing country CERs were at 0.88 euro, their lowest ever. Volumes are minimal and purchasing in the more meaningful 5-8 euro range continues, but that is for ‘special projects’ with unique environmental and social benefits, or from programs of activities—a parallel system introduced into the clean development mechanism to make systematic reductions through various programmes.

The first major price decline was in 2009, when recalibrated growth plans forced firms in Europe to offload permits they had acquired for future usage. But the effects of the 2008 crisis were worse than anticipated and firms further offloaded credits in 2010-11, forcing prices to fall further.

Prices are a reflection of supply and demand. The emissions cap for the European Union Emissions Trading Scheme (ETS)—2008-12 period—was considered ambitious. But the 2008 crisis radically altered the picture and the ETS has since experienced a surplus of allowances and international credits compared to emissions. The number of allowances put into circulation by European governments has been higher than industry demand. Supply and use of international credits have increased. According to the European Commission (over the period 2008-11), 8,171 million allowances were put into circulation and 549 million international credits used for compliance, in total adding up to 8,720 million permits that were available for compliance. In contrast, emissions in the same period were only 7,765 million tonnes of CO2 equivalent. By early 2012, a surplus of 955 million allowances had accumulated. Even if international credits were excluded, the surplus would still have been 406 million allowances.

Emissions in 2012 and 2013 are not expected to change significantly. Therefore, the surplus at the start of the next phase, 2013-20, could be as large as 2 billion.

But the oversupply problem does not end there.

An important element of the EU’s strategy for meeting its Kyoto commitment is the EU ETS. EU governments issue allowances that can be traded by companies. For Kyoto consistency, each allowance is equivalent to, and shadowed by, a corresponding assigned amount

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