EU Carbon Fix That Boosts Power Prices ‘Stupid,’ UBS Says

A European Commission proposal to boost carbon prices as a way to spur investment in clean energy technology is misguided because it would push power costs to “unacceptable” levels, according to a UBS AG (UBSN) analyst.

“That viewpoint is rather stupid, because we need to get the carbon price to at least 25 euros ($32) a metric ton for it to stimulate emissions savings,” Per Lekander in Paris wrote in an e-mailed response to questions. “Such a carbon price would increase the German wholesale electricity price by 50 percent and thus it wouldn’t be acceptable.”

The euro area’s slowing economy has cut demand for carbon emission permits, aggravating a surplus that drove prices in the world’s biggest greenhouse-gas market to a record-low 2.81 euros a ton in January. Europe’s parliament votes April 16 on part of a plan by the region’s regulator to temporarily withhold the sale of some allowances over the next three years.

Carbon permit prices have plunged 83 percent since 2008, according to ICE Futures Europe exchange data. Contracts for delivery in December rose 1.2 percent today to 5 euros a ton at 3:37 p.m. in London.

The commission’s proposal is known as backloading because it would cut the supply of permits covering 900 million tons of emissions through 2015 and reintroduce the allowances near the end of the decade. The surplus has grown to about 1.9 billion tons, according to Bloomberg New Energy Finance.

Backloading would push prices to about 13.50 euros a ton in 2015, New Energy Finance estimates show.

Emission Limits

The EU’s cap-and-trade system, introduced eight years ago to help meet greenhouse gas-reduction targets, imposes emission limits on power plants and factories. The program allocates permits to polluters that must surrender enough allowances to cover their discharges of carbon dioxide or pay fines.

The low cost of carbon allowances means the penalty for burning cheaper fossil fuels such as coal is relatively small.

“I think it will be very hard to get the needed agreements to get the carbon market going,” Lekander said. “It will continue to exist but really be rather irrelevant.”

Incomplete data from the commission published yesterday showed emissions in the EU’s carbon market program probably dropped about 1.4 percent in 2012.

German power for 2014 reached a record-low 40.20 euros a megawatt-hour on March 20 and was at 41.45 euros today, according to data from brokers. It was as high as 61.75 euros in April 2010.

Backloading Opposition

EU Climate Commissioner Connie Hedegaard is confident her plans to bolster carbon prices will be enacted as policy makers realize inaction may lead to the demise of the emissions trading program, she said March 27.

Poland, Europe’s third-biggest carbon emitter, is among nations that oppose backloading.

“The market is sound if it works, and it does,” Marcin Korolec, Poland’s environment minister, said on his Twitter Inc. account today.

The commission’s proposal may make the surplus of allowances even worse closer to 2020 as withheld permits are released back to the market, said Daniel Rossetto, director of Climate Mundial Ltd., a London-based adviser on carbon markets.

“Backloading won’t fix the problem,” he said in a March 28 e-mail. If the bloc abandons the plan, policy makers must reassure the market they will adopt a better fix as soon as possible, he said.

A unified statement from the commission, parliamentarians and nations “would avert a big sell-off if people know that backloading is being ditched to make way for a more comprehensive reform,” Rossetto said.

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

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net

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