EU green plan backfires, carbon price slumps

LONDON, (Reuters) – A European plan to raise funds  for clean energy has backfired spectacularly, helping trigger a  rout on its carbon trading scheme and so cutting available green  funds and benefiting polluting coal plants.

Additional causes for the latest sell-off included eurozone  woes over Greece, and an EU efficiency directive announced this  week which could send carbon emissions lower.

The EU’s emissions trading scheme has endured a slew of  damaging scandals from its launch in 2005, including VAT fraud,  the re-sale of used credits, phishing scams and cyber-theft.

Most importantly, the scheme which is supposed to cap the  carbon emissions of about 11,000 factories and power plants has  seen a permanent surplus of permits called EU allowances (EUAs)  since its launch in 2005.

That glut, partly a result of a financial crisis which cut  economic output and pollution, is just about to get worse thanks  to a European Commission plan to sell an extra 300 million  permits on the market to raise funds for green energy projects.

Carbon prices <CF12ZZ1> have fallen 30 percent in three  weeks to 12 euros a tonne, largely because of the plan, traders  say.

That drop in carbon costs has sent the profit margins of  polluting British coal plants up more than a tenth.

“Certainly this should push more coal plants into merit,”  said Barclays Capital carbon analyst Trevor Sikorski.

The more profitable a coal-fired power plant, the higher it  rises in a merit order for example compared with gas.

Meanwhile the carbon price drop has cut the value of the  clean energy fund, if the EUAs were auctioned on Thursday, to 4  billion euros from 5.4 billion euros on May 31.

Polluters have already benefited from the emissions trading  scheme to the tune of tens of billions of euros since 2005, from  a combination of selling surplus EUAs that they did not need and  passing on to consumers the cost of permits which they got for  free.

Ten individual polluting companies in 2010 accumulated a  combined EUA surplus worth over 4 billion euros, the Sandbag  green lobby group said on Monday.

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Continuing low prices could further undermine the usefulness  of the EU’s flagship climate change scheme in curbing emissions.

The carbon fund is meant to raise money from selling 300  million extra EUAs before the end of 2012, especially to help  fund carbon capture and storage (CCS) projects which trap carbon  emissions from power plants and bury these underground. EUA prices on Friday dropped to 11.85 euros a tonne, their  lowest since April 2009, as jitters over the extra glut hit the  start of a seasonal summer slump in buying, driving record  volumes in a sell-off on the main CO2 exchange.

Other reasons for the sell-off included the macroeconomic  outlook, specifically the prospect of a Greek default, and  concern that a proposed EU efficiency directive may drive EUA  demand lower.

The directive failed to confirm explicitly a previous option  that the European Commission could remove surplus EUAs if  efficiency targets drove carbon prices lower.

“If you look at all those factors, there are few reasons to  go and buy CO2,” said Andrew Ager, head of emissions at Bache  Commodities. Traders are no longer betting on any real recovery  in prices until 2014 at the earliest, when over-supply eases.

The profit margin from UK power sales for the next quarter  has risen to 8.15 pounds per megawatt hour (MWh) at midday on  Thursday, from about 7.30 pounds on June 1, illustrating how the  cost of buying EUAs has plunged while power prices have held up,  especially benefiting coal.

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