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Low carbon price means emissions trading system is failing, say utilities

23 Feb 2012 18:13:09 | edcm

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Less than a week before a crucial vote on the supply of carbon allowances in phase III of the EU Emissions Trading System (ETS), a coalition of energy companies has urged policymakers to curb the amount of credits in the market.

In an open letter released on Thursday, the coalition told the European Commission and Council that the EU ETS is failing to stimulate investment in low-emissions energy or even trigger a switch to existing low-carbon plants because carbon prices are too low.

New plants are now more likely to be fuelled by polluting lignite coal than by renewable sources or natural gas, it said.

The EU ETS is designed to cap emissions below a business-as-usual scenario. This is aimed at delivering predetermined carbon cuts at the lowest possible price.

However, policymakers also want the scheme to push companies to invest in carbon-cutting technology, which the system so far has failed to do.

An oversupply of allowances and low prices have plagued the EU ETS in phase II, as the recession hit industrial output and consequently demand for allowances.

A curb on allowances, a so-called set-aside, would support emissions allowance prices. However, such a move is unlikely to be approved before phase III, which starts in 2013.

Industry pressure

The eight utilities, including major emitters like Denmark's DONG Energy and the UK's SSE, support a set-aside proposal currently before the European Parliament, said Bas Batelaan of SSE.

"The low ETS carbon price - with oversupply of emission allowances for 2020 - is far from providing the foundation for investments in renewable energy technologies, and does not encourage a shift to existing relatively low-carbon gas-fired power plants either," the companies said in the letter.

Policy expert supports set-aside

The argument for the set-aside was also made this week by climate policy expert Nicholas Stern, lead author of a landmark 2006 report on climate change and the global economy.

"It's a good idea to have a floor under the emissions price, and you can do that by having a tighter amount of credits. I think the policy to intervene in the market to keep up the price because confidence in carbon prices is needed to stimulate investment," Stern said at an event in London on Tuesday. A vote on the set-aside is due on 28 February 2012. VF

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