Carbon futures tumble in Europe as energy utilities make efficiency gains

Coal Power Plang - Arnold Paul

By Justin Bull

April 3, 2014

The recent release of power station efficiency data from the United Kingdom has caused the price of carbon futures in London to tumble by 29 percent. According to Bloomberg, the drop is the biggest in almost a year. Analysts fear that European energy utilities are getting more efficient at generating electricity, undermining the price of carbon.

According to Matthey Gray, an energy analyst at Jefferies Group LLC in London, the data from the UK “reminded the market that amidst the implementation of backloading, the ETS [Emissions Trading Scheme] remains a deeply ineffective piece of public policy.”

At its launch, the European Union ETS granted utilities a certain number of carbon credits based on reported emissions. Utilities tended to over-report, providing them with excess carbon credits to sell on the open market. Backloading is a new strategy that the ETS is using to fight this glut of credits, by delaying the sale of some permits to help buoy prices.

On April 1 more than 12,000 energy installations across Europe will be reporting on their energy efficiency gains. And if the data from the UK is an accurate indicator, utilities across the continent will have even more excess permits to sell. Power stations in the UK managed to cut their carbon emissions by 8 percent last year, a figure likely to be seen across Europe.

The troubled ETS underlies the difficulty in crafting climate change policy. Cap-and-trade was intended to allow the market to determine the cheapest sources of carbon reductions, thereby bringing market efficiency to bear on carbon emissions.

Instead, issuing carbon permits was fraught with complication. Energy utilities actually profited from their carbon permits by overstating their emissions and selling excess carbon credits. These surplus allowances have undermined the entire system, and many are calling for significant reforms.

Alternative climate policies can help avoid the pitfalls of a cap-and-trade. In British Columbia a simple carbon tax has proven successful in helping drive down emissions. The tax is revenue neutral – money raised goes back to citizens in tax breaks – and has helped to encourage actual changes in consumer and industrial behavior. According to The Atlantic, the tax is “the most effective in North America,” and academics and policy makers are looking to BC as a strong example of sensible climate policy.



Photo Credit: Paul Arnold