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Unit 1 Micro: The Collapsing Price of Carbon

Geoff Riley

3rd April 2012

The price of carbon emissions permits inside the EU's emissions trading system has fallen to a record low. A sharp fall in total CO2 emissions in Europe has been the driving factor behind the fall in the carbon price. Last year Germany's CO2 emissions fell by 1.2% and the UK saw a 7.2% reduction. The overall decline in the 27 country ETS was 2.4% in 2011 causing the carbon price to drop below 7 Euros per tonne.

Several factors lie behind the contraction in emissions. A relatively warm winter and the weakness of EU industrial production provide two key explanations because the ETS focuses on around 12,000 factories and power plants across Europe. The EU has a policy of widening the coverage of the emissions-trading scheme including the vexed policy of including aviation this year. Growing capacity in and use of renewable energy across the EU is another factor and a favourable one for climate change campaigners.

The low price of carbon reflects structural excess supply of permits (in only one year since 2005 has the level of CO2 emissions in the EU exceeded the annual carbon emissions) and a price hovering around 6 Euros per tonne is well below the level needed to provide incentives for green investment. Indeed at these low prices, coal-fired energy becomes increasingly viable especially with the high international price of oil.

In 2010 carbon prices were between 15-17 Euros per tonne. They have slumped further since this chart was created (source: Commons Select Committee Report, January 2012)

EU Carbon Emissions Price

The EU is considering introducing a set-aside scheme for the carbon emissions market whereby millions of permits would be withdrawn in a bid to move the carbon price higher.

Carbon price diagrams

The UK has cut its carbon emissions by at least 23 per cent since 1990 and it is on track to meet their Kyoto targets. But keep in mind that, although Co2 emissions have fallen in Europe, global emissions continue to rise.

Oxford economist Dieter Helm asks us to distinguish between carbon production and carbon consumption. Rising imports of carbon-intensive consumer products made in other countries lead our carbon footprint to continue rising year on year. According to a recent Commons Select Committee report “In the UK's case, although the production of carbon has fallen by
15% between 2005 and 2009, once carbon imports were included, carbon consumption had in fact risen by 19% over the same period"

Click here for more articles from Dieter Helm.

The UK Carbon Price Floor

On 23 March 2011 the Chancellor announced a Carbon Price Floor of £16 tonne of carbon dioxide in 2013, rising to £30 by 2020 in 2009 prices. The Carbon Price Floor sets out a minimum price of carbon that would apply only in the UK. It works by charging a “top-up" tax on emitters if the price of EU Allowances falls below the pre-determined price floor. The starting price would be equivalent to £19.16 in estimated 2013-14 prices

Here is the Treasury's justification for their unilateral carbon price floor

“Supporting the price for carbon in the UK electricity generation sector can reduce revenue uncertainty and improve the economics for investment in low-carbon generation. The level of the carbon price and its uncertainty is one of a number of factors affecting investment in low-carbon generation. The UK requires up to £200 billion of investment by 2020 to secure a low-carbon energy future. This is necessary to ensure access to more secure supplies of energy and reduce greenhouse gas emissions. The development of new low-carbon technologies will also provide economic opportunities for UK businesses. In order to benefit from these opportunities the Government is committed to creating a more stable environment for investment in low-carbon electricity generation."

A Commons Select Committee report published in January 2012 has criticised attempts to artifically use top-up taxes to create a carbon price floor (Energy committee attacks UK carbon price) They argue that the top up tax will increase retail energy prices for hard-pressed consumers, increase the risk of fuel poverty and could lead to industry and electricity production relocating to other countries.

More reading:

Firms say low carbon price threatens EU green targets

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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