Carbon prices have fallen dramatically in recent times, with the price of carbon losing almost two thirds of its value in the past six months. Coal and oil markets have also suffered. However, these markets stabilised in December, whereas carbon values have continued to slide into 2009.
THE CURRENT CARBON MARKET
Global recession, reduced manufacturing output, and the associated reduction in the consumption of fossil fuels have all contributed to the depression in value of the commodity. It has been predicted by industry analyst, Point Carbon, that the size of the global carbon market will fall 32% in 2009 to €62.6bn as the economic recession continues to dampen demand for carbon credits.
Although prices of EU Allowances ("EUAs") and UN backed Certified Emission Reductions ("CERs") have more than halved in recent months, trading activity has increased, with companies party to the European Union Greenhouse Gas Trading Scheme ("EU ETS") finding themselves with excess credits that they can sell. Companies appear not only to be selling off their excess credits, but are also rumoured to be selling off credits which will be needed in the future as a means of raising cash, in the knowledge that they will have to buy these back at a future date, most likely at a higher price.
"It's anecdotal at the moment, but there is some evidence that companies are selling more than their surplus EUAs and are effectively robbing Peter to pay Paul", said Alessandro Vitelli, IDEAcarbon analyst.
There appear to be some firms saying 'let's just worry about getting through this year'. They are simply focused on survival and will worry about buying back the credits they need from the market at a later date."
It is feared that a repeat of the over-issuing of EU ETS permits, which occurred at the first phase of the scheme in 2007 may reoccur, creating a crisis of confidence in the market and potentially jeopardising future projects. This, along with the economic downturn creates suppressed values and uncertainty. Jeff Chapman, chief executive of the Carbon Capture and Storage Association has stated:
"The problem is that investors can't bank on the future value of carbon. It is impossible to take a project proposal to a bank based on future price because we have seen the price collapse once before, and now it is doing it again".
However, Henrik Hassleknippe of Point Carbon has argued that a complete collapse in the price of carbon is unlikely as demand from energy companies for EUAs is likely to remain relatively stable
Additionally, it is feared that such downturn in demand may impact on the expected values for Renewable Obligations Certificates ("ROCs"). EnergySpectrum states that ROCs may achieve lower than expected values because the recycling shortfall against demand-driven targets will be lower. As matters stand, this year's power demand downturn will cut around £1/ROC from long-term values compared with the recent 1% or so annual growth. A more enduring demand fall will squeeze potential ROC values further.
The question is raised whether the Government will try to ensure carbon prices are pushed up to encourage low-carbon investment, or whether they will instead try to take short term measures to combat the effects of the recession.
THE WORLDWIDE IMPACT OF FALLING CARBON VALUES
Under the Kyoto Protocol's Clean Development Mechanism ("CDM"), industrialised countries can invest in overseas low-carbon projects as a cheaper alternative. However, low carbon prices within the industrialised areas are now reducing the incentive to invest in less developed areas, such as China and India.
James Murray of BusinessGreen writes that it is estimated that the number of CERs being generated by CDM projects will fall 45% on last year.
A FLOOR PRICE FOR CARBON?
Lord Adair Turner, the chairman of the Government's Committee in Climate Change has backed calls for a floor price on EUAs.
It is believed by some that imposing such a floor price would provide greater confidence in low carbon infrastructure. Lord Turner has told MPs that if the EUAs remain at their current level it will remove the incentive for firms to invest in low carbon technologies.
These proposals have, however, received some criticism from the industry with many analysts confident that the market will recover and that intervention could potentially distort the market and make the future link up with other cap-and-trade schemes worldwide more difficult.
On the topic of a potential floor price, Alessandro Vitelli of IDEAcarbon stated:
"A floor price simply gives the market a massive get out clause that means it can't do its job. You give investors more visibility over the future, but that will not guarantee that investment flows towards low carbon projects again".
He added that an alternative way to regulate carbon prices would be for governments to delay the auction of fresh EUAs on the market.
FUTURE PREDICTIONS FOR CARBON MARKET
Opinion regarding the timescale for recovery of the carbon market is mixed. Whilst some believe that the carbon market will recover swiftly once industrial output begins to climb again and that significant expansion should be seen in 2009 in emerging carbon markets such as Australia and the US, others are more sceptical.
Investor confidence has no doubt been shaken by the reduction in values. It is hoped by many that economic recovery and tighter allocation will increase the value of carbon. However, it is reported that such improvement may not be seen until 2013.