Green Europe Imperiled as Crisis Triggers Carbon Collapse

The European sovereign debt crisis that’s spread from Greece to Italy and is roiling the region’s banks now has another potential victim: energy policy.

European Union emission permits, needed by polluters from utilities to cement makers for each ton of the carbon dioxide they put in the atmosphere, slumped to their lowest price in 2 1/2 years on Oct 4. An auction of permits by Greece, trying to avoid the euro area’s first default, worsened a glut of the allowances, UBS AG analyst Per Lekander said last week.

Lower carbon prices discourage European utilities including EON AG and GDF Suez SA from investing in wind farms and solar plants that don’t need permits. The industry needs to spend as much as 900 billion euros ($1.3 trillion) by 2020 to meet a target of getting 20 percent of power from renewable sources, Citigroup Inc. estimates. The economic slowdown is adding to carbon-permit supply as manufacturers and generators sell allowances not needed by idle factories and power plants.

“The thing that will most kill renewable development is low carbon prices,” said James Cox, an analyst at energy consultant Poyry in Oxford. “If the Eurozone crisis continues, that will lead to an extremely low carbon price and it makes it difficult to invest in low-carbon generation.”

Price Drop

EU carbon permits for delivery in December fell to 9.82 euros a metric ton last week, the lowest price since February 2009 and a 46 percent decline from May’s year-to-date high. That compares with the 16-pound (18.44-euro) price floor the U.K. has suggested is necessary to ensure investment in low-carbon generation. EU permits rose 2.2 percent to 10.69 euros a ton as of 11:26 a.m. today on London’s ICE Futures Europe exchange.

The “price level does not encourage investments in low- carbon energy generation capacities,” Georg Oppermann, a spokesman for EON, said by phone from Duesseldorf. “Companies will only invest if they can expect higher prices in the future.”

The EU cap-and-trade system, which puts limits on more than 11,000 utilities and manufacturing companies across the union’s 27 members, began in 2005 and is now in a second phase that ends in 2012. In the third stage starting in 2013, the majority of power plants will be required to purchase all their permits.

The program is the cornerstone policy to meet a binding target to cut carbon emissions 20 percent from 1990 levels by 2020. The EU may seek to cut carbon release by as much as 95 percent by 2050.

Adjust the System

“We have seen similar price developments during the first wave of the economic crisis in 2008,” Daniel Kluge, a spokesman for Germany’s BEE renewable energy lobby, said in a telephone interview. “The emissions-trading system needs to be adjusted to be able to react better to the expansion of renewables and short-term economic developments.”

The U.K. is one country looking at ways to remove carbon- price uncertainty from investment decisions. Britain, which plans to install more than 8,000 offshore wind turbines by 2020, has proposed measures including the 16-pound carbon floor price starting in 2013, rising to 30 pounds by 2020.

“The current volatility of the price of carbon is indicative of wider issues within the electricity market that need to be addressed,” Electricite de France SA’s U.K. division said in an e-mailed statement. The price floor will “begin to restore the carbon price signal to what was originally intended by creation of the EU emissions-trading scheme.”

Urgent Action

Europe must take “urgent action” to prevent further declines in carbon prices, according to Graeme Sweeney, Royal Dutch Shell Plc (RDSA)’s vice president of Future Fuels and CO2. He recommended withholding some carbon permits in the next phase of the program to ensure prices are high enough to encourage low- carbon investment.

A program to fund carbon-capture and storage projects that bury emissions underground may run afoul of the plunge in carbon prices, PricewaterhouseCoopers LLP said. The EU plans to help finance carbon-capture sites and other renewables investments with money raised from the sale of 300 million permits from a reserve in the next phase of the carbon trading system.

The drop in carbon prices means the storage projects, more expensive than most renewables investments, may not get the funding they need, said Jonathan Grant, London-based assistant director of sustainability and climate change at PwC, the management consultant.

Add Supply

Once the European Investment Bank starts selling permits from the reserve this year it will add more supply to the market. As well as governments, companies are getting rid of permits to shore up balance sheets in the face of tighter credit markets, acccording to Barclays Capital analyst Trevor Sikorski.

European countries have 93 million permits from the so- called new entrant reserve that they can sell by the end of 2012, according to researcher Bloomberg New Energy Finance. Sales such as those undertaken by Greece last week may add to the market’s volatility, BNEF analyst Konrad Hanschmidt said last month.

Jean-Francois Cirelli, the president of Europe’s largest utility, GDF Suez (GSZ), said in September that the EU is “not a stable political environment” and utilities will struggle to raise the money needed for new plants. “It is unimaginable it will be financed easily.”

To contact the reporters on this story: Kari Lundgren in London at klundgren2@bloomberg.net; Stefan Nicola in Berlin at snicola2@bloomberg.net.

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net.

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