Market participants are unenthusiastic about the recommendations of the UK parliament’s Environmental Audit Committee’s report, which was released yesterday (February 8).
Tim Yeo, chair of the Committee, said that: “Ministers should seriously explore the possibility of a carbon tax and must press the EU to tighten up the overall caps in the Emissions Trading System.”
The report said that: “Moves to tighten the EU Emissions Trading Scheme (ETS) in its third phase (due to start in 2012) may improve the scheme’s effectiveness, but the Committee is worried that the use of offsets and the banking of surplus credits from Phase II could continue to undermine it.”
The Committee calls on the UK Government to push for the EU to adopt a target that better reflects climate change science and gives a tighter cap, to auction as many allowances as possible, and to press the EU to improve its response to recession driven reductions in demand and review the cap frequently.
Andy Ager, head of carbon and emissions at Bache Commodities in London, thinks that: “The implementation of a floor would be detrimental to the market.”
Patrick Birley, the chief executive of the European Climate Exchange, said that although the price of carbon has been depressed, “it’s wrong to say that the system is not delivering.”
He said he “would be opposed to proposals to introduce a minimum price” and that he was against the idea of a clause in the ETS which enabled the caps to be reassessed according to macroeconomic parameters. “The joy of the system that is in place is that the supply is known in advance,” he said.
In his view, the market is working well at the moment and there are long-term supply signals from the European Union which the market is reacting to.
Anthony Hobley, partner and head of global climate change and carbon finance at Norton Rose, said that one “could argue that a market-based approach was flexible both ways.”
He said that: “The reason the price is lower is that emissions have been reduced... we can’t blame the market system.”
But he added that a low floor could be useful. He said regulators “could create a floor for the worst case scenario, for extreme economic events.” He stressed however that this would be “a low floor, designed to deal with unusual events—not a floor in the ordinary course.”
Alex Desbarres, a senior renewable energy analyst at Datamonitor, on the other hand, said the idea of a carbon cap and floor was good.
“The carbon price is too low, too volatile. It provides no long-term visibility for the investment community,” he said.
“What the investment community is looking for is a minimum price level over the long term.”
But he said that prices of €100/ tonne “would have a devastating impact” at the moment.
Siân Williams +44 207 779 8370 swilliams@fow.com