Little support for carbon floor price

08 May 2009

Business and regulators have responded to calls for a floor price for carbon credits with a fairly resounding "No!" writes Stephen Gardner. The idea of a minimum value for carbon has been put forward in recent weeks in response to concerns about carbon markets in the recession. Industrial output is falling, and the price of a tonne of CO2 on the European Climate Exchange stood at around €12 at the beginning of April, down from around €30 in mid-2008. If manufacturing continues to struggle – such as production of steel for cars – the carbon allowance surpluses held by industrial firms covered by the European Union's emissions trading system (ETS) will grow. This will mean less demand on the carbon markets and even lower prices. As the expense of buying allowances is supposed to push businesses to invest in emission-cutting technologies, the longer-term environmental benefits of cap-and-trade could be lost. Governments also could lose revenue. After 2012, EU ETS allowances will be increasingly sold to market participants through auctions, rather than being given for free. Governments were meant to plough auction proceeds into climate change mitigation and adaptation. If ETS participants need fewer allowances, this could be under threat. The Climate Strategies think tank at Cambridge University says this can be avoided by placing a floor price on allowances sold at auction. If bids are not high enough, the allowances will be taken out of the market, restricting supply and thus pushing up the carbon price. Climate Strategies chair Michael Grubb said March 26 that the ETS was facing "circumstances that could drive prices extremely low for sustained periods," and a reserve price could be the answer. His words echo a PricewaterhouseCoopers report published earlier in March that said that a "hybrid" carbon pricing scheme could combine the flexibility of cap-and-trade with predictability based on a floor price for auctioned credits that would effectively set a minimum carbon price. But Brussels, where the EU ETS is ultimately administered, is not keen. Barbara Helfferich, spokeswoman for the ETS regulator, the European Commission, said the ETS had always been intended as a market-based instrument. "A floor price may unduly interfere with the market," Helfferich said. "We have had price lows already and the market has not collapsed." Daniel Cloquet of industry federation BusinessEurope also cautioned against interference. "Who would determine what is the right floor?" he said. Michela Beltracchi of the International Emissions Trading Association (IETA), which represents carbon market participants, traders and investors, said that 75 percent of IETA members that responded to an internal survey were against price floors "and any form of intervention." If the objective of the ETS was to drive abatement of CO2 emissions at the lowest cost, "we can't by definition have a price floor," Beltracchi said. However, the Commission's Helfferich said that the ETS could conceivably be reviewed depending on the outcome of December's United Nations climate summit in Copenhagen, at which negotiators hope to conclude a deal to replace the Kyoto Protocol. The ETS could also be influenced by the way other cap-and-trade schemes develop, especially in the United States. If the emphasis is placed on keeping the carbon price high to drive green investment and to raise money for climate-related good causes, things could change. But for now, a floor price for carbon is unlikely to get off the ground. A version of this article was originally published in Ethical Corporation magazine.

 

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