Price of EU Carbon Permits Falls to All-Time Low

The decision to dole out free pollution permits to certain segments of European industry in the EU carbon market continues to look like a critical misstep.

The cause of the most recent collapse in the price of carbon in the European market is not just blatant over-allocation—as it was in 2006— the precipitous drop is a direct result of the global economic downturn that has European manufacturers down as much as fifteen percent. The problem is that the this creates another windfall for the parts of European industry that receive free permits.

The flood of credits into the carbon trading market has caused the European carbon price to drop rather precipitously from its summer peak of €31 to its current levels of around €11. Some analysts believe the price will fall to as low as €5 or €6.

Giles Parkinson explained today at the Business Spectator how this new windfall in the EU carbon market is playing out:

“According to market analysts, these industries have been selling excess credits at the rate of some €150 million per week over the last two months. Some in the EU might like to think the companies are reinvesting these windfalls into clean energy or energy efficiency projects, but that seems unlikely in the current market.”

Parkinson makes three critical points about these developments. First, he calls into question the wisdom of handing out carbon permits in terms of driving down the value of the permits bought and sold on the market. Second, he notes that the unfortunate implication of these artificially low carbon prices is that they have dropped so low, they are not stimulating new investments in clean energy - the very purpose of their creation.

>>See: First Carbon Auction in U.S. Hailed as Big Success

Finally, Parkinson rightly suggests that this sudden drop in the price of carbon permits helps build the case that other policy mechanisms (tax credits, feed-in tariffs, renewable energy portfolios, etc.) can and should be used in tandem with the emissions permit trading model to reduce carbon emissions.

Image: © Neotakezo | Dreamstime.com

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