Prospect for Carbon Credit Prices

Carbon credit prices are set to rise from the beginning of the third phase of the EU’s Emissions Trading scheme if, as expected, parties are obliged to buy their full quotas via auction, rather than the current system of free allocation. There is also talk of a baseline being implemented for carbon credit prices, fixing a minimum price, in the fight to reach the 2020 target of 5.2% lower emissions on 1990 levels.

The Emissions Trading Scheme has come in for criticism for not effectively enough fulfilling its purpose of resulting in true reduction in emissions from heavy polluters across the EU. Phase one of the EU ETS ran from 2005 to 2008. Polluters were given a carbon quota with one credit representing one ton of carbon emissions, or its equivalent in other greenhouse gases. Emissions to the equivalent of one ton of one ton of carbon meant one carbon credit had to be retired, with the number of credits allocated to the particular emitter, being their ceiling for emissions over the three year period. In the event that an emitter used up their allowance of carbon credits, they would have to buy additional credits from either other emitters with a surplus, or carbon reducing projects allocated with carbon offsets. The idea was that this carbon trade would put a monetary cost on emissions above the allowed level, and pay for the offsetting of these emissions elsewhere, creating an overall gradual reduction in global greenhouse gas emissions.

The criticism of phase one, and two a lesser extent the current phase two, where the carbon credit allowance runs from 2008 to 2012, is that emitters were handed allowances large enough that there was a carbon credit surplus and no real reduction in emissions took place. In reality, carbon allowances were such that emissions actually rose slightly over phase one. Phase two has seen a slight reduction, but emission levels are still around the 2005 baseline. Proponents of the scheme argue that phase one can be considered an implementation period where emitters were essentially trained in the carbon credit system and its mechanics while giving them time to plan for more stringent emission quotas. Phase two has seen carbon credit quotas reduced and emitters beginning to tighten their belts in terms of emissions.

Phase three is where things really kick in. The industries and emitters covered by the scheme will be widened. One prominent example of this widening reach of industries which will come under the carbon credit system, is the airline industry. Also, whereas in phase one and phase two, initial carbon quotas were allocated, not paid for, it is mooted that in phase three the overall carbon credit pool will be auctioned off, with polluters bidding for the level of emissions they will be entitled to make. Between 2013 and 2020, the overall pool will be reduced by 1.75% annually, with the aim of hitting a 21% reduction on the 2005 emissions baseline for EU emissions, by 2020.

Whether or not some reduced degree of allocation will remain, or whether a full auction system will be implemented, carbon credit prices will almost certainly rise as reduced quotas invert the supply and demand ratio which has so far existed in the more lenient first and second phases.

The balance between establishing a higher market-based carbon price, and not making EU exports uncompetitive due to the additional cost burden compared to regions without a carbon cap, or a less strict one, will be delicate. With the EU fully committed to the EU ETS system it will have to be found if the carbon system is to be justified as a truly effective means to reducing global emission levels.

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