Harvard Don Tells EU Kill Grants to Save Carbon: Energy Markets

Europe may have to change course to save the world’s biggest carbon market after an unprecedented plunge in pollution-permit prices, according to a pioneer of so- called cap-and-trade systems designed to help the environment.

The European Union should consider moving away from costly subsidies for renewable energy and carbon-efficient projects, which compete with the market in meeting nations’ emission- reduction targets, said Robert Stavins, the director of Harvard University’s Environmental Economics Program. Carbon permits for December fell to an all-time low after lawmakers yesterday rejected a rescue plan to tackle a record surplus of allowances.

Prices in the EU’s 54 billion-euro ($71 billion) emissions market have slumped 63 percent from a year ago as the euro area’s second recession since 2008 cut industrial demand for permits, exacerbating the glut. The cap-and-trade system, started in 2005, is the bloc’s main tool in meeting greenhouse gas-reduction targets, a model gaining favor from California to China and Australia.

“This would be a foolish time for the EU to back away from cap-and-trade because the rest of the world is starting to follow,” Stavins, who helped set up a market system to control acid rain in the U.S. 30 years ago, said in a phone interview yesterday. “The climate and energy directorates in Brussels need to work together going forward to ensure they’re interacting benignly instead of in perverse ways.”

Carbon Plunge

Carbon fell as much as 19 percent to a record 2.50 euros a metric ton on the ICE Futures Europe exchange in London, compared with 31 euros a ton in 2006. It traded at 2.57 euros at 2:04 p.m.

Australia will lower its expected revenue from selling carbon allowances after the EU, its partner in a cap-and-trade system set to start in 2015, failed to win support for its surplus fix, Climate Change Minister Greg Combet said today.

Europe’s emissions-trading system imposes limits on about 12,000 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. Declines in the cost of allowances erodes the incentive for them to stop burning cheaper fossil fuels and invest in carbon-efficient technology.

Backloading Critics

EU parliamentarians opposed a proposal to alter the bloc’s emissions trading law yesterday, which would have enabled the European Commission to withhold the sale of some allowances through 2015 and reintroduce them at the end of the decade in a strategy known as backloading.

The Parliament’s vote followed criticism from lawmakers including the European People’s Party, the biggest group in the assembly, which argued that the move amounted to market intervention and would boost energy prices at a time when the economy is shrinking. Gross domestic product in the region contracted 0.6 percent last year and will decline in 2013 by 0.4 percent, according to the median of 61 economist forecasts compiled by Bloomberg.

EU Climate Commissioner Connie Hedegaard, who proposed backloading as a stopgap measure, said the vote was “not the total end of everything” and she would continue to work on a more permanent fix.

“Many of those who don’t support backloading believe in the emissions-trading approach,” Dirk Forrister, president of the International Emissions Trading Association, a Geneva lobby group, said yesterday by e-mail. “Emissions trading continues to be the policy of choice for addressing climate change.”

Renewables Cost

EON SE, Germany’s biggest utility, estimated in November that solar technologies were costing consumers at least 10 times more than prices suggested by the carbon market at the time, when permits were more than 6 euros a ton.

“The emissions trading system has sadly become marginalized, and we are concerned that it has lost its ability to prompt low-carbon investments,” according to Oeystein Loeseth, chief executive officer of Vattenfall AB, the biggest Nordic utility. “Against this backdrop, the EU needs to recalibrate,” he said in a statement yesterday.

The bloc provided $50 billion of renewable-energy support in 2011, the highest level in the world and more than double the U.S.’s $21 billion, according to International Energy Agency estimates from Nov. 12. The commission, the EU’s regulatory arm, said in a March 27 paper that the bloc needs better coordination between its energy efficiency, renewables and climate policies.

Those targets “do absolutely nothing for the environment” in an economy with a cap-and-trade market because they merely shift emissions to other industries, Stavins said.

U.K. Floor

EU carbon permits will fall to near zero as the bloc seeks to repair the market, said Patrick Hummel, an analyst in Zurich for UBS AG.

“There is no plan B in my view,” he said yesterday by e- mail. “Instead, we might see some national governments thinking about carbon taxation, but of course this debate is at the very beginning.”

The U.K., the market’s second-biggest emitter, set a floor on carbon prices this month to encourage investment in clean- energy projects.

The EU vote shows policy makers shouldn’t start “a war” against their emitters while most of the rest of the world isn’t regulating greenhouse gases, said Matteo Mazzoni, an analyst at NE Nomisma Energia Srl in Bologna, Italy.

The EU will probably take two years to address the oversupply because of resistance from manufacturers and other energy-intensive industries, which lobby lawmakers, Mazzoni said.

“Some people may object to the fact that the EU got out in front” in its bid to tackle climate change, said Harvard’s Stavins. “I’m not going to applaud and I’m not going to jeer.”

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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