麻豆传媒

ONE of the world鈥檚 flagship projects to tackle climate change has reached crisis point. The scheme, which allows European companies to trade their emissions of carbon greenhouse gases, was designed as a cost-effective, economically liberal solution to global warming. Now unforeseen market forces and the self-interest of some member governments are in danger of wrecking the dream.

That at least is the fear of climate negotiators, who are reeling from a week of bad news that suggests the very notion of trading in carbon permits may be impractical. However, many traders and analysts say the scheme still has a bright future, as long as members respond to the current crisis.

The European Union鈥檚 emissions trading system was launched at the start of last year. Under the scheme, more than 11,000 manufacturers and power companies responsible for almost half the EU鈥檚 greenhouse emissions receive annual pollution permits from their governments. They can then buy and sell those permits to match their actual levels of emissions.

The aim is to provide an incentive for companies to reduce emissions, so that they can sell the spare permits to companies that exceed their own allocation. The system is critically dependent on governments getting the initial allocations right, but first time round, they have failed.

Emissions of greenhouse gases in the EU last year were much lower than predicted 鈥� 44 million tonnes short of the overall allocation made at the start of 2005. Rather than being a cause for celebration, it appears that many governments handed out too many permits, creating a glut in the market, with many sellers and few buyers. As a result prices for carbon pollution permits went into freefall last week, collapsing from a high last month of 聛per tonne of carbon to a low of 聛 late last week. But on Monday, prices partially recovered, reaching 聛at one point, apparently on promises by the German government to retrospectively withdraw excess permits for 2006 and 2007.

鈥淢any governments handed out too many permits, creating a glut in the market, with many sellers and few buyers鈥�

With the existing allocations in place for another year and a half, there are fears that the entire system could collapse, with prices potentially falling to zero. That may be no accident. 鈥淭here is no question that some allocations have been self-serving. Some countries have been complicit in setting lax allocations,鈥� said Abyd Karmali of analyst firm ICF International.

鈥淐ompanies can sell spare carbon permits to companies that exceed their allocation as an incentive to reduce emissions鈥�

The biggest offender was Germany, the largest emitter in the EU. Its industry lobbied for and won extra allocations from the government 鈥� 21 million tonnes, or 4 per cent of the country鈥檚 overall allocation, more than needed, according to figures released by the European Commission on Monday. Other countries that issued more permits than their industries needed included the Czech Republic, Denmark, France, Portugal, Belgium and Hungary.

By contrast, the UK appears to have been the most conscientious in its initial allocation. Its companies last year emitted 33 million tonnes more than their allocation 鈥� mainly because power stations burnt more coal and less natural gas than anticipated. British companies are likely to be prominent among the firms that will remain buyers of permits. Other countries whose industries exceeded their emissions allocations included Spain and Italy.

The contrast between the UK and Germany helps explain why, last year, the British government took legal action against Brussels in an effort to get its allocations revised upwards. Civil servants belatedly realised that other governments had treated their companies more leniently. Although the British government recently dropped the action, several major British energy companies have said they will continue the fight.

If the EU carbon market collapses it would be a critical blow to the idea of harnessing market forces to ensure the most cost-effective investment in cutting greenhouse emissions. The EU market has been expected to become the cornerstone of a global carbon trading system. 鈥淭he stakes are incredibly high,鈥� says Keith Allott, head of climate at environment group WWF.

But while the European carbon trading scheme is entering a critical phase, some observers are sanguine about current events. They say the high prices set at the start of the scheme were never realistic and the market is, in part, simply readjusting. 鈥淭he present situation of falling prices is no surprise. The price in the first phase was always expected to be low,鈥� says Tobias Persson of the Center for International Climate and Environmental Research in Oslo, Norway.

It is also worth remembering that the current allocations, which run until the end of 2007, are essentially just a pilot phase. Though real enough for the companies involved, they do not count towards meeting national emissions targets under the Kyoto protocol, which only take effect from 2008. 鈥淭he carbon market collapse has come just in time. Getting allowances right for the first Kyoto compliance period is what really matters,鈥� says Michael Grubb of Imperial College London, a long-time observer of carbon emissions policy.

鈥淭he carbon market collapse has come just in time. Getting allowances right to comply with Kyoto is what really matters鈥�

Last week the EU environment commissioner Stavros Dimas said the price crash will force governments and the European Commission to review how the allocations starting in 2008 are issued. He says 鈥渟trong decisions鈥� will be necessary for the EU to meet its collective target of an 8 per cent cut in emissions from 1990 levels during the first Kyoto compliance period. And time is tight. European governments are due to submit their proposed emissions allocations for 2008 to 2012 by the end of June. Grubb warns that Europe could be 鈥渟leepwalking towards a fiasco鈥�.

However, despite the gloom, those trading in the carbon market remain confident. Amid the furore over collapsing prices for the current permits, few have noticed that 2008 permits are already for sale and prices remained buoyant throughout. Meanwhile, the outlook for carbon trading both within Europe and around the world remains bright.