“Selling allowances would not be happening if they’d had to pay for them in the first place,” he says.

“If everybody had to pay for the allowances on a pay-as-you-go basis, like other commodities they consume, the price for carbon allowances would have fallen anyway as a result of this recession,” he says.

David Victor, head of Stanford University’s Energy and Sustainable Development Program, says that between a third and two-thirds of CDM offsets do not represent actual emission cuts.

http://newsvote.bbc.co.uk/mpapps/pagetools/print/news.bbc.co.uk/1/hi/business/7857771.stm?ad=1A crucial scheme to control greenhouse gases is under threat due to the recession. Under the Kyoto Protocol adopted in 1997, since ratified by 183 countries, industrialised nations agreed to reduce their emissions of gases such as carbon dioxide (C02) which cause global warming.

Among the measures introduced was the European Carbon Trading System, whereby governments put a price on the amount of greenhouse gases that can be emitted by any company.

By forcing companies to pay for the right to pollute, it was hoped they would be more inclined to clean up their act.

Companies are issued emission permits and are required to hold an equivalent number of allowances (credits) which represent the right to emit a specific amount.

The total amount of allowances and credits cannot exceed the cap, limiting total emissions to that level.

Companies that need to increase their emission allowance must buy credits from those who are willing to sell.

In effect, the buyer is paying a charge for polluting, while the seller is being rewarded for having reduced emissions by more than needed.

Three-quarters of the main polluting greenhouse gas, carbon dioxide, comes from burning fossil fuels – oil, gas and coal.

The environmental group Carbon Trade Watch complains about imbalances in the sources of the burning of fossil fuels, as the world’s richest countries consume more per capita than countries with larger populations.

For instance the USA produces 24% of the world’s CO2 emissions yet has only 4.5% of the world’s population. Conversely India has 16.7% of the world’s population yet only produces 4% of the CO2 emissions.

It seemed like a market solution to global warming in Europe, but initially many of these permits were given away for nothing.

Now, as recession bites, industries like steel, cement and glass may be polluting less, but only because they’re producing less.

So companies are desperately selling off the carbon credits they no longer need to bolster their faltering balance sheets

That has led to a big drop in the market value of carbon permits, and as the right to pollute becomes cheaper, there is less incentive for companies to stop polluting.

Mark Lewis, a carbon analyst at Deutschebank, told World Business News that the recession has cast a spotlight on the frailties of emissions trading.

“Selling allowances would not be happening if they’d had to pay for them in the first place,” he says.

“Getting them free allows them to be sold on a risk-free basis and that is exacerbating the fall in the price of credits,” he adds.

Each year the cap on emissions gets tougher, but the price of the credits would have come down anyway as a result of the financial downturn.

“If everybody had to pay for the allowances on a pay-as-you-go basis, like other commodities they consume, the price for carbon allowances would have fallen anyway as a result of this recession,” he says.

In the past, Russia has managed to achieve its Kyoto targets without any pain because its industrial output has declined so sharply.

Critics of carbon trading maintain this proves the inherent weakness of such systems, but Mr Lewis does not think a straight tax on fossil fuels would provide a better solution.

“It might be simpler on one level,” he says, “you would know in advance what the price was but you wouldn’t get any certainty on the level of emissions reduction.”

Another measure introduced under the Kyoto Protocol to curb greenhouse gases is also coming into question.

This is the clean development mechanism (CDM), which allows industrialised countries to invest in projects that reduce emissions in developing countries – as an alternative to what would undoubtedly be more expensive emission reduction programmes in their own country.

However, in recent years, criticism against the mechanism has increased.

Offset projects under Kyoto are only supposed to qualify for carbon financing if they represent emissions reductions above and beyond what would have happened anyway.

In practice, large numbers of projects that were already well under way, are presenting themselves as CDM projects in order to gain an extra revenue stream, and these projects do not represent additional emissions reductions, Carbon Trade Watch maintains.

David Victor, head of Stanford University’s Energy and Sustainable Development Program, says that between a third and two-thirds of CDM offsets do not represent actual emission cuts.

If an offset project does not represent reductions and is being used to justify increased emissions at some other point, it actually represents a net increase in emissions.

If a high number of CDM projects are not additional, there is a real danger of a “carbon bubble”.

Scientists are adamant that CO2 emissions must be sharply cut in the next 10 years otherwise there will be irreversible damage to the planet.

Otherwise, it might be too late to repair the damage the planet has already suffered.

“…Falling prices for European carbon emissions permits could stunt investment in the renewable energy sector both within and outside Europe, but the credit crunch continues to have a greater impact…”

“If the price goes too low, we won’t get investment in the kind of infrastructure we want to see. You might be more tempted to invest in a coal-fired power plant if you thought the carbon price would stay at 15,”

http://www.reuters.com/article/GCA-GreenBusiness/idUSTRE4AQ43420081127 

Renewable energy’s rapid growth has been slowed by the credit crunch and financial crisis: energy projects depend on debt finance which is now in short supply and more costly.

A falling carbon price could worsen the economics of renewable energy further, as falling demand for carbon emissions permits in a deepening recession pulls down carbon prices, benefiting fossil fuels.

“If the price goes too low, we won’t get investment in the kind of infrastructure we want to see. You might be more tempted to invest in a coal-fired power plant if you thought the carbon price would stay at 15,” said Deutsche Bank analyst Mark Lewis.

The EU emissions trading scheme (ETS) forces businesses to buy carbon emissions permits which have halved in price since July to less than 15 euros last week, their lowest level since March 2007. They traded at 16 euros on Thursday.

Carbon prices can direct the daily operation of power generators, potentially encouraging them to switch to gas from higher carbon-emitting coal. In addition, they could drive longer term investments into low carbon sources of electricity.

So far their influence has been more on day-to-day decisions, especially given uncertainty about the future direction of carbon prices.

Analysts say that the credit crunch is the main drag now on investments — “Solar or wind developers are not reviewing their investment plans because of the energy price, but because of problems securing financing,” said Michael McNamara, senior analyst at Jefferies bank.

The carbon price came bottom among factors utilities consider for low-carbon investments — cost of capital, construction cost, planning consent and assumptions about fossil fuel prices all came higher, said a utilities analyst who declined to be named.

Utilities were assuming carbon prices would rise in the long-term, however, he added.

CARBON PRICE

The EU launched its emissions trading scheme in 2005. The market imposes a cap on industrial carbon emissions but allows companies to offset these by funding cuts in the developing world instead, a cheaper option.

In that way the scheme can direct energy investments in both rich and poor countries. The ability to sell carbon credits is a major source of income for some renewable energy projects in developing countries.

“In places that rely on carbon credits to support new projects, such as China, India and Latin America, the fall in price will delay or possibly kill the marginal, less economically viable projects, but the credit crunch will still be the primary factor regarding growth,” said Tom Murley, head of renewable energy at private equity investors HgCapital.

“…Carbon prices plummeted in early November and continued their drop on Monday to around 17 euros a tonne, a 19-month low. They have followed other commodity and energy markets lower in the face of a European recession…”

“…Analysts said strong selling was pushing carbon prices lower as European companies, hoping to raise cash in the financial crisis, liquidate their EU emissions permits…”

http://www.forexpros.com/news/commodities-&-futures-news/analysis-floor-for-eu-carbon-price-seen-at-15-euros-6329 

LONDON, Nov 17 (Reuters) – European carbon emissions could fall to 15 euros a tonne, halving a two-year high hit this summer, if industrial output and crude oil prices fall further.

Analysts see a potential low of 15 euros for EU carbon prices on a combination of lower industrial output, more emissions permits coming to market and falling oil prices.

Crude oil prices, which strongly influence carbon prices, hit a 22-month below $55 a barrel low last week.

Analysts said strong selling was pushing carbon prices lower as European companies, hoping to raise cash in the financial crisis, liquidate their EU emissions permits.

Analysts and traders predicted earlier this month that prices would go lower before they could rebound to above 20 euros a tonne [ID:nLV577819].

Carbon emissions futures for December 2008 delivery have not traded below 15 euros since March 14, 2007. The benchmark contracts have fallen some 42 percent since hitting the 2-year high of 29.69 euros a tonne in early July.

The EU Emissions Trading Scheme (EU ETS) gives installations a certain quota of emissions permits called EU Allowances (EUAs), and forces them to buy more to cover any carbon emissions surplus.

“In the near-term, 15 euros which is the price people paid for (carbon offsets imported from developing countries) is a technical floor,” said UBS analyst Per Lekander.

Further cuts in industrial output would reduce emissions, thereby reducing demand for EUAs which would drive prices lower.

Added to that, many EU member states which have delayed giving industry their 2008 quota of EUAs are issuing permits now, significantly increasing the market’s supply.

Italy said it will issue nearly 200 million EUAs this week, following Germany’s allocation of over 300 million last week [ID:nLE64551]. The UK also plans to auction 4 million allowances on Wednesday and the Netherlands said it will distribute 86 million EUAs on Dec. 1.

FIRM FLOOR

Under current EU proposals, unused EUAs issued between 2008-2012 can be banked through to the scheme’s third phase, which runs from 2013-2020.

As a result, analysts say is unlikely that the market will see the same over-suppy that led to a total price collapse in the scheme’s first phase (2005-2007), as there is more incentive to hold EUAs than to sell them at current prices.

Barclays Capital’s Trevor Sikorski said that a deep EU recession would still see a shortage of some 500 million tonnes.

“It is unlikely that the economic downturn will change the fundamental balance of the market,” he said, adding that fuel-switching could also provide price support.

“EUAs could definitely go lower but there would be some support from fuel-switching at around 15 euros.”

Cheaper prices for high-carbon fuels such as coal and oil would encourage power generators to switch from cleaner natural gas, which could force utilities to buy more EUAs.

“(The carbon price) depends on how much further coal falls. Coal demand in China has fallen through the floor. If coal keeps coming down, it is very difficult for people to ignore it as a fuel,” said Alessandro Vitelli, a director at IDEAcarbon.

The market is also supported by EU policy, which requires companies generating CO2 emissions to buy permits.

“We shouldn’t be too worried as policy support holds the market up. The EU said there was no ’sunset clause’ for the EU ETS,” said Vitelli.

“It’s there and it’s staying.”

For additional news and analysis on the global carbon markets, go to http://www.communities.thomsonreuters.com (Editing by William Hardy

“..One way to play the carbons emissions angle is via Barclays Bank PLC Global Carbon ETN (NYSE:GRN). These Exchange Traded Notes seek to replicate the Barclays Capital Global Carbon Index Total Return. This index is tied to the performance of the most liquid carbon-related credit plans, and as such is looked at as an industry benchmark for carbon investors…”

http://seekingalpha.com/article/105266-energy-investments-under-obama-eye-on-barclays-carbon-etn

Obama wants to enact legislation that implements a wide-ranging cap-and-trade system to reduce carbon emissions by 80% by the year 2050.

Currently, the index has only two carbon-related credit plans in it: the European Union’s Emission Trading Scheme (EU ETS Phase II) and the Kyoto Protocol’s Clean Development Mechanism.

It’s Barclay’s intention to add new carbon-related plans as they are developed, and certainly any plan the U.S. introduces would add to the attractiveness of this ETN as an investment. Shares are thinly traded, but are off 43% from their highs reached this past July.

As his new term unfolds, President-elect Obama’s greatest challenge will be to act as a catalyst to foster the creation of an energy coalition of both Democrats and Republicans.

Given the seriousness of our current situation, there’s a reasonably good chance he’ll have strong bi-partisan support in areas related to energy legislation.

We’ll continue to monitor Congressional energy actions, and report any meaningful and actionable ideas right here. In the meantime, turn down that thermostat and let up a little on the gas…

“…reduce demand for carbon allowances by around 44 per cent over the 2008-12 period, according to IdeaCarbon, and is already reflected in the recent fall in the price of EU allowances from a peak of €29.33 in July to €17.40 in late October. IdeaCarbon’s director of strategy and intelligence, Andrea Vitelli, said: “Our latest forecasts suggest EU industrial output will grow at just 1 per cent in 2008, and shrink by 0.7 per cent in 2009. This will reduce the level of emissions from industry across Europe, and therefore cause a drop in the shortfall of credits.”

http://www.investorschronicle.co.uk/MarketsAndSectors/Sectors/article/20081106/bbbf4732-ab30-11dd-8c7b-00144f2af8e8/Recession-smudges-carbon-outlook.jsp 

The prospect of a full blown global recession could threaten the health of the carbon trading markets, according to carbon market analysts IdeaCarbon, as the slowdown in economic activity across Europe threatens to slash the projected shortfall between European Union carbon allowances and European industry emissions.

This could reduce demand for carbon allowances by around 44 per cent over the 2008-12 period, according to IdeaCarbon, and is already reflected in the recent fall in the price of EU allowances from a peak of €29.33 in July to €17.40 in late October. IdeaCarbon’s director of strategy and intelligence, Andrea Vitelli, said: “Our latest forecasts suggest EU industrial output will grow at just 1 per cent in 2008, and shrink by 0.7 per cent in 2009. This will reduce the level of emissions from industry across Europe, and therefore cause a drop in the shortfall of credits.” On top of industrial output decline, lower gas prices are leading to a switch from coal to gas-fired power generation, which produces less emissions.

The knock-on effect could threaten the economic viability of projects in the developing world which create carbon credits to be sold into the European system. Aim companies Camco, EcoSecurities and Trading Emissions could all find their development plans affected by the falling carbon price.

KBC’s director of research Andrew Shepherd-Barron said: “Lower prices for carbon are not a great thing. The emphasis at the moment is on delivery of existing projects but this will take out marginal projects.”

Climate Exchange, which operates the European Climate Exchange and Chicago Climate Exchange, could be hit by lower transaction volumes, but its latest trading figures, which showed record volumes in October in Europe, suggest no effect yet.

“Industrial companies are busy selling off any surplus EUAs in order to raise short-term cash. EUA prices have fallen from their July 1 peak of €29.33 to a low on October 28 of €17.40. These surplus EUAs are being snapped up by European utilities, which face a far greater shortfall of allowances than their industrial counterparts.”

http://www.businessgreen.com/business-green/news/2229648/recession-push-carbon-price