The EU ETS will require emissions to rise

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22 April 2013, Gas

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If this seems perverse, that is because it is. It is clear that EU trade interests have been put above climate change goals as EU legislators rejected the backloading proposal on April 16, 2013, which caused the value of permits to fall to a low of EUR2.46 per tonne.

The implications of this decision will be felt for some time, while an EU carbon price that is so low that it can be called irrelevant will impact decisions regarding high and low carbon generation as well as hampering the union of the Australian emissions trading system in July 2015, where expectations have been based on a carbon price of between A$29 and A$61 per tonne.

For a clear insight and a global perspective on the EU ETS, see Datamonitor's recent report "Australia, China, and the US: Three Differing Perspectives on the EU ETS" (EN00037-069).

Further to this is the case of rising emissions and whether the EU ETS is having the desired effect. Despite huge investment in renewable energy generation and increased renewable generation output by as much as 20% in the UK in 2012, emissions rose in the UK, France, and Germany by 4.7%, 3.9%, and 0.5% respectively as coal power generation increased, largely due to the low carbon price. This alone completely undermined the renewable energy movements in these European countries in 2012.

For a detailed insight into the EU ETS, look at Datamonitor's recent reports including "Future Outlook of the EU ETS: Will Past Mismanagement Impact Further Expansion?" (EN00037-070).

It should be understood that reducing the supply of emissions permits and raising the carbon price would have a cost to energy intensive businesses in Europe, while industries located outside of Europe would not be subject to the same charges. Reducing the competitiveness of European industry and raising costs at a time when Europe is trying to emerge from recession would not necessarily be the best course of action, and this seems to have been the view of the majority of voters, albeit by a small margin.

There is still time for the EU carbon price to recover, but without reducing the supply of allowances it will require the EU to emerge from the prolonged recession, emissions outputs to rise, and demand to increase. Emissions are still within the target band, but failing to reduce emissions allowances now may prove a missed opportunity as emissions intensive generation expands. However, keeping the emissions price low will benefit European export businesses and may go some way to achieving the long-term goal of economic growth, albeit at the expense of reduced incentives for investment in low carbon technologies and future emissions targets. / / @DatamonitorEN

Source: MarketLine

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