EU carbon market plunges 40% after backloading vote

BRUSSELS/LONDON, Jan 24 (Reuters) - EU carbon prices briefly slid 40 per cent to a record low after politicians opposed an emergency rescue plan, raising concerns the market could hit zero and scupper efforts to curb planet-warming emissions.

Prices of permits in the EU's Emissions Trading Scheme (ETS) on Thursday dropped to €2.81 ($A3.60) a tonne after a non-binding vote by the European Parliament's energy and industry committee against the rescue proposal.

They later climbed back above 4 euros in volatile trade.

"This should be the final wake-up call both to governments and the European Parliament," EU Climate Commissioner Connie Hedegaard said on Thursday, in a statement.

She urged the 27 EU member states to throw their weight behind the Commission's proposal, referred to as backloading, to support prices by removing temporarily some of a huge surplus of carbon allowances and returning it to the market in later years.

Otherwise, EU-wide energy and environment policy could fragment, she said.

"The alternative is a re-nationalisation of climate tools, meaning a future patchwork of up to 27 different systems and taxes instead of one market creating a level playing field internally in Europe."

The $148 billion ETS is core to Europe's efforts to encourage utilities and industry to go green, but carbon prices are far too low to provide that incentive. Analysts say prices need to be between €20 and €50 to make utilities switch to lower carbon energy generation.

Here to stay

Launched in 2005, the scheme is in its third trading phase, which runs until 2020.

Commission officials say it is here to stay and that technically it is liquid and functioning, just too weak to deliver low carbon investment and innovation.

"There's no end date to it in legislation," Jos Delbeke, director general of the Commission's climate department, said at a Brussels debate on Thursday.

"But if we don't have it (the backloading), we will have to live through a period of low prices."

Thursday's vote is only part of a long EU process. While not binding, it was the latest sign of the struggle the EU faces in reaching agreement to intervene in the carbon market.

A vote in the environment committee, expected next month, as well as another in a committee of representatives of member states, will be far more decisive.

So far, coal-intensive Poland is opposed, Britain wants a more ambitious plan and Germany, the bloc's most influential member, is undecided.

If the European Union cannot agree on the backloading plan, much more ambitious structural reforms, which the Commission has outlined, will also have to wait, almost certainly for years.

Euro sceptics and those who oppose regulation, such as energy-intensive industries, may celebrate, but others want a coherent EU-wide policy and ultimately a global carbon price, along the lines of the global oil market.

"Many in the business community have been clear on this issue for over a decade. It's all about putting a price on carbon," David Hone, climate change adviser for Royal Dutch Shell, said.

"Policymakers need to focus on the single clear goal of a carbon price in the energy system, rather than multiple energy mix targets. This is what business really needs," he added.

Since the EU ETS started in 2005, it has been beset by problems including tax fraud and an over-allocation of permits, which generated windfall profits for polluters.

Prices crashed to near zero in 2007 from a peak of €32 in April 2006 because of the over-allocation of permits. Traders today dismiss that collapse, blaming it on early errors in the experimental phase of the market.

The crash spurred Commission reforms and a less profligate allocation of allowances, which helped boost prices to almost €30 in 2008, a level many market participants do not expect again this decade.

Today's plunge below €3 was, however, an over-reaction because a technical trading level was breached, traders said.

"Liquidity vanished for a moment, and that caused the freefall (in prices)," one carbon trader at a utility said.

Many speculative traders had set their stop-loss positions at €5, and when carbon prices fell below that level, it triggered automatic sales.