The European Union’s move to prop up the price of carbon pollution in its greenhouse gas trading market could result in significant increases in carbon prices. The EU slashed in half the amount of carbon permits it will auction off this year, and the smaller supply could force prices up by 34% this year, according to a median survey of analysts put together by Bloomberg. The EU will take the extra permits and “backload” them, or reintroduce them into the carbon market at the end of the decade.
The EU carbon market, the world’s largest, is valued at about $47 billion. Around 13,000 factories and utilities are required to participate. They must obtain enough permits – each equivalent to the right to emit one metric ton of carbon pollution – to offset their annual emissions. If they do not, they must pay a fine. On the news that the EU will backload permits, the price to emit a metric ton of carbon jumped by 10% to 4.85 euros, or $6.65. The price hit a 9 month low at the end of March. A Reuters survey suggests that prices could rise to around 6.95 euros in the second quarter, and then further to 7.55 euros in the second half of 2014. Higher prices will increase costs to heavy industry, as well as producers and users of oil, gas, and coal.
The move was seen as necessary to give the carbon market teeth, after years of oversupply. The sluggish European economy, coupled with real declines in emissions, have led to a glut of permits. With emissions low and permits well-supplied, the price cratered.
The EU may consider longer-term fixes to the carbon market such as automatic cuts in permit supply. While the bloc had originally planned to implement those fixes starting in 2021, a few member countries such as Germany and Denmark support an earlier move, perhaps as soon as 2016.
By Charles Kennedy of Oilprice.com
Charles is a writer for Oilprice.com