EU carbon credit surplus doubles in 2012

By John Parnell

A flood of international carbon credits has further distorted the struggling EU carbon market, figures published today have revealed.

Emissions from static sources covered by the cap and trade system, mainly power stations and large industrial complexes, fell 2% during 2012 the latest Union Registry figures showed.

This positive result was overshadowed by an influx of carbon credits from the international markets as companies looked to exploit a closing loophole on the eligibility of certain methods of earning emission allowances.

“The good news is that emissions declined again in 2012. The bad news is that the supply-demand imbalance has further worsened in large part due to a record use of international credits,” said Connie Hedegaard, EU climate action commissioner.

European climate commissioner Connie Hedegaard said the latest data was a reminder of the need to reform the EU carbon market (Source: EC)

The price of carbon in the EU has hit record lows this year due to an oversupply of credits.

This has been caused in part by the recession as the resultant decrease in industrial output also meant less emissions. Lower than hoped carbon reduction targets in the EU also means the cap on emissions has been set too high.

“At the start of phase 3 [Jan 1, 2013], we see a surplus of almost two billion allowances. These facts underline the need for the European Parliament and Council to act swiftly on backloading,” said Hedegaard. The surplus was 950m credits in 2011.

Backloading

The so-called backloading proposal would delay the entry into the market of more than 900m allowances to address this imbalance and give a short term boost to the price of carbon.

The European Parliament voted against the plans in April with a new vote on an amended proposal set for July.

Earlier this month the campaign group Sandbag estimated that that the number of surplus credits was approaching the European Commission’s “worst case scenario”.

“By setting the carbon budgets too high, policymakers have inadvertently granted European emitters a license to pollute at business as usual levels for much of the next decade,” said Damien Morris from Sandbag

The use of credits from the UN-backed international offset markets also doubled in 2012 as companies looked to exploit a closing loophole previously described as “perverse” by Sandbag.

UN rules allowed companies to destroy super greenhouse gases like HFC-23, and earn credits at a very low cost.

“Because 2012 was the last compliance year of phase 2, it was the last chance to use HFC-23 and N2O adipic acid, so called ‘grey’ credits, for compliance within the EU ETS framework,” said Marcus Ferdinand, senior market analyst at Thomson Reuters Point Carbon.

“Market players couldn’t carry over, or ‘bank’, these credits into phase 3, so they either had to use them or sell them before the phase closed – they’d lose all value otherwise.”

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