The price is right

Over the past few months the price of allowances in the EU-ETS has fallen quite sharply, down from €25 per tonne of CO2 in the third quarter of 2008 to a low of some 8, although In recent days there has been some recovery back to around 12.

The fall is linked with the sharp decline in a wide range of commodity prices and also with the matching decline in overall economic activity – which in turn is leading to lower industrial emissions. There is also anecdotal evidence that some companies are selling banked allowances to raise cash, putting additional supply into the market. 

This price movement has brought the trading critics out again, claiming that emission reductions now won’t take place in the EU and that this means the trading system isn’t working. But the reality of the situation is very different.

Irrespective of the price, emission reductions are taking place and the cap is being met. The source of these reductions may not be from the low CO2 emission projects we all want to see, but principally through the reduction of industrial activity. Call it a side effect of the recession, but importantly the cap set for the EU-ETS continues to be met and continues to ensure that the EU is on track towards its 2020 target.

Some are already calling for government intervention to limit the price fall, but perhaps we should just let the market do its job. And it will.

Using data available in the public domain, a colleague in Shell Trading put together the chart below. It shows that even with a recession led decline and consequent banking of a current allowance surplus, the trading system will need to deliver about 2 billion tonnes of additional emission reductions by 2020. This is equivalent to backing out some 10 GW of coal fired power station emissions with renewables, nuclear or carbon capture and storage every year from 2014 onwards. That’s 10 GW in 2014, another 10 GW in 2015 and so on. Bringing on such capacity is going to mean significant investment starting today. Of course it won’t all be power stations, but the example is uselful in that it helps establish the scale of what is going on in the EU.

Industrial companies and power generators in the EU can all do these calculations. Whilst the current market may reflect an immediate supply / demand situation, it isn’t going to derail the strategy that many companies across the EU have doubtless already put into play.