Burgess COMMENTARY

Peter Burgess

Polluting Is Getting Expensive in Europe Again: Carbon & Climate

Vapor escapes from cooling towers at a coal-fired power plant in Janschwalde, Germany. The 28-nation European Union is changing its 40 billion-euro ($50 billion) emissions market after the glut caused prices to collapse to levels that don’t deter the burning of coal, the most polluting fuel, data compiled by Bloomberg show. Photographer: Krisztian Bocsi/Bloomberg

The surge in European carbon permit prices may just be beginning.

The price of emission rights will rise 61 percent by June 30, according to the median of 16 trader and analyst estimates compiled by Bloomberg. UBS Group AG says costs may more than double in 2015. Carbon already jumped 45 percent this year, while the 22-member Bloomberg Commodities Index (BCOM) slid 14 percent.

The 28-nation European Union is tightening supply in the 40 billion-euro ($50 billion) emissions market after a glut caused prices to collapse to levels that don’t deter the burning of coal, the most polluting fuel, data compiled by Bloomberg show. Lawmakers want to spur more growth in renewable energy through the first permanent changes to the 10-year-old system.

“Because most governments selling allowances have a vested interest in higher prices, it will happen,” Louis Redshaw, a former head of carbon at Barclays Plc and founder of Redshaw Advisors Ltd., which buys and sells permits on behalf of factories, said Dec. 16 in London. “Painful” price swings are probable, he said.

Benchmark prices are headed for the first annual increase since 2010. The cost of emitting a metric ton of carbon dioxide has fallen 77 percent from the peak of 31 euros in April 2006. They traded at 7.16 euros today on the ICE Futures Europe exchange in London.

Record Glut

The accumulated surplus in the system exceeds 2.1 billion tons, or more than a year’s supply, according to the European Commission. Governments handed out more permits than needed to factories and utilities just as the global recession caused manufacturing to contract and power demand to weaken.

To curb the glut, the EU proposed a market stability reserve, or MSR, to start in 2021 that will adjust the amount of permits auctioned. When the surplus exceeds a given limit, allowances will be taken off the market and put in the reserve, and returned if there’s a shortage.

The plan follows a temporary measure from this year to withhold 900 million tons from auctions through 2016 and return them in 2019-20.

To be enacted, the carbon reserve proposal needs support from national governments representing a majority of the bloc’s population, as well as the backing of the European Parliament. The assembly’s environment committee votes on the issue Feb. 24. Latvia, which assumes the EU presidency in January, said this month it plans to ensure a deal on MSR is made by June 30.

Political Agreement

The complexity of getting legislation through parliament means the bloc will probably fail to reach a political agreement by June 30, Espen Andreassen, a carbon analyst for Markedskraft ASA in Arendal, Norway, said Dec. 10 by phone.

“There are still disagreements between nations and disagreements between committees” in the bloc’s parliament, he said. The temporary reduction took more than two years to agree to, he said.

Changing the rules of the market in the middle of the current trading phase, which runs from 2013 to 2020, will deter “serious, hard-nosed investors,” Daniel Rossetto, a director of energy adviser Climate Mundial Ltd. in London, said by phone Dec. 8.

The results in the Bloomberg price survey were based on the legislative scenario anticipated by the greatest number of respondents. Six predicted the reserve would be introduced early in 2017, with the withheld permits going into the reserve. Under that scenario, the median price forecast for June 30 is 11.50 euros, with predictions ranging from 8.25 euros to 20 euros.

Energy Traders

“Returning the 900 million allowances to the market would be an absurd thing,” Gunnar Steck, who heads the emission market task force at the European Federation of Energy Traders, said Dec. 4 from Dusseldorf, Germany.

Five of those surveyed expect the MSR to start in 2021 and the 900 million withheld permits going straight into the reserve. The median forecast for this scenario was 10 euros.

The remaining five also predict the MSR will begin in 2021, though with the withheld allowances returning to market, as proposed in January by the European Commission. The forecast based on that scenario was 8.25 euros.

Even doubling the price of carbon allowances won’t drive them to levels needed to spur power utilities to burn natural gas instead of using coal, which emits twice as much carbon dioxide. Emission prices would need to exceed 40 euros to encourage that switch in Germany, according to a Bloomberg analytics tool that assesses the level of allowances needed to make gas as profitable as coal for power utilities.

Without higher greenhouse-gas prices and additional incentives for around-the-clock power generation, the region will struggle to raise the $2 trillion needed through 2050 for clean electricity, the Paris-based International Energy Agency said Dec. 1 in a report assessing the bloc’s policies.

“Three years ago, some people were thinking carbon trading would die,” Barbara Lambrecht, an analyst at Commerzbank AG in Frankfurt, said yesterday by phone. “The market is now convinced there is a political tail wind for carbon trading. We see a further recovery in carbon permits in the coming months.”

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net

To contact the editors responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net Nicholas Larkin, John Deane