Eastern European allowances reveal weakness of the EU carbon market

Only in Poland and Estonia there will be extra 80 – 90 tons of CO2 emitted in the atmosphere in one year. The two countries won court challenges against the European Commission limits on carbon-dioxide emissions by energy and manufacturing companies.

This decision of the European Court of First Instance took the market by surprise, said Daniel Butler, carbon trader and Senior Consultant at the Czech based Wallich & Matthes. The market was down anyway and we expected a downward trend. However, this made the market to drop hard, it was the straw that broke the camel’s back. If early September 2009 a carbon certificate revolved around EUR 15, now it might get to EUR 8, argues Butler.

The European Court of First Instance in Luxembourg ruled in its Judgment that the European Commission has a restricted authority to review national plans for allocating CO2 permits in the EU emissions trading system, ETS – European Trading Scheme, the biggest greenhouse-gas market in the world today. The Commission set tough CO2 limits on Eastern European Member States.

The European Commission, however, is contemplating an appeal to the European Court of Justice.

More similar cases are pending from Hungary, Bulgaria, the Czech Republic, Latvia, Lithuania and Romania.

The rulings may undermine a push to curb the supply of CO2 allowances in the EU market as six other nations in Eastern Europe demand looser limits. With the United Nations negotiating an accord to fight climate change, the Commission aims to make fossil fuels more expensive and turn the European emissions trading system into the cornerstone of a global market.

The Copenhagen deal in December does not look good from this perspective, believes Butler. USA and China seem to want to go separately and not link to a global market. I would not say that this is the end of the carbon market but it sure induces a lot of pessimism. At the moment we talk (September 25, 2008 a certificate is worth EUR 12.5). And that is not all: many carbon funds will close down.

Probably the extra tons of carbon will not affect the atmosphere too much as the European production market is very weak. Steel mills work at a little capacity, industrial centers are slow, there is an obvious economic slow down and that means less carbon, explains Butler.

In October 2008, as the financial crisis started to bite, a ‘rebellious’ group of EU Member States pressed for a deferment of the date at which EU’s plans for emissions targets were supposed to be accepted as binding. A group of Eastern European nations and Italy were gathered into a protest against emissions reduction. The leaders of the ‘revolt’ were the Italian Prime Minister, Silvio Berlusconi, and his Polish counterpart, Donald Tusk. Governments of Bulgaria, Hungary, Estonia, Latvia, Lithuania, Romania and Slovakia followed them.