LONDON: European Union's leadership in the fight against climate change, already under fire at UN talks in Qatar, suffered a further setback on Friday as the carbon market it created to help spur a switch to greener energy tumbled to a record low.
The $148 billion EU Emissions Trading Scheme is core to Europe's efforts to prompt utilities and industry to go green but carbon prices are currently far too low to provide that incentive.
Friday's fall in prices followed a decision by the European Commission to postpone a vote on a plan to help bolster the market until next year.
"Perversely, a plan to raise prices has so far done anything but," said one emissions trader, who wished to remain anonymous.
Carbon hit a record low of 5.89 euros per tonne while many analysts see a minimum price of at least 20 euros as necessary to convince industry and utilities to adopt cleaner forms of energy over coal and gas.
The plan which EU member states will vote on proposes to remove a portion of carbon permits from the market for several years in order to bolster demand.
"It will take another 6 months before the proposal is totally buried, then the price will crash to very low levels," said Per Lekander, managing director at UBS Investment Bank, who does not think the plan will be passed.
The EU ETS has been hurt by Europe's economic slowdown, which has lowered demand for carbon permits. Cheap gas and coal prices also make it harder to wean users off of them.
Analysts say it could take until after the 2013-2020 trading period before demand is sufficient to mop up the market's current oversupply of carbon permits.
"I think the scheme will eventually recover, but not until the economy is better and a fourth trading period starts in 2021," said UBS' Lekander.
The scheme, which was launched in 2005, caps carbon emissions on factories and power plants in the 27-nation bloc, forcing them to buy carbon permits if they exceed the limit.
Traders are eager for the Commission plan to be signed off by member states, so prices can regain some ground.
"Without the plan, there is no reason for prices to be above zero as the market is over-supplied well beyond 2020," said Kris Voorspools at Luxembourg-based consultancy 70Watt Capital.
The ETS is legislated to run until at least 2020 and a Commission spokesman said the scheme is "here to stay" despite a recent call by Italy for it to be replaced by a carbon tax.
It is the biggest emissions trading system in the world and plans to link with Australia's scheme by 2018. Yet many traders have left the market over the past couple of years due to a lack of confidence in its future.
As the European Commission looks at ways to address its underperformance, it also faces opposition from some countries, including coal-reliant Poland.
Germany also refuses to take a formal position until a clash between its economy and environment ministries is resolved.
If the Commission's plan to remove some permits from the market is approved in a vote now not due before February, it would become law possibly in the second half of 2013.
Carbon prices could rise to 15 euros or more in the 12-18 months afterwards, according to Deutsche Bank.
Yet that is still not high enough for large energy companies including Shell, BP and Dong Energy, who say that prices of between 20 and 50 euros are needed to justify investment in clean technologies such as carbon capture and storage.
"This episode is the clearest indication that we cannot rely solely on the scheme to deliver decarbonisation and that more fundamental reforms are required," said Sanjeev Kumar, senior associate at consultancy E3G.