Tuesday, May 2, 2006

PARIS — Dark clouds suddenly have gathered over the fledgling market for carbon dioxide (CO2) emissions, where prices plunged by more than half last week as European countries discovered they were polluting far less than they thought.

The innovative market was established under the Kyoto Protocol for controlling emissions of greenhouse gases — the carbon gases emitted mainly by burning oil, gas and coal that most scientists think are driving climate change.

Its backbone is the Emissions Trading System (ETS) of the European Union.

Under the system, 11,500 firms that are big users of fossil fuels must meet target levels for CO2 emissions or else pay a penalty of $50 per metric ton for 2006 and 2007 — a punishment that will rise to $125 per ton in 2008.

Companies that have used less than their quota can sell their surplus on the ETS to companies that have used more than their quota, thus providing a financial carrot to companies to exceed the requirements.

At the start of last week, CO2 was changing hands at $37.75 a ton, compared with $25.80 a ton at the beginning of the year.

On Wednesday, the price fell to $29.45, and on Thursday, the price fell to $20.75. On Friday, it closed at $16.60 ahead of the May 1 holiday.

“The downturn is due to exceptional circumstance — the publication of verified emissions by a number of European countries,” said Jean-Francois Conil-Lacoste, director-general of Powernext, Europe’s biggest CO2 market.

Authorities in five of the 25 EU countries — France, the Netherlands, the Czech Republic, Estonia and Belgium’s Wallonia region — reported that their CO2 pollution last year was less than their quota levels, whereas Spain said it had exceeded its quota, but by less than expected.

This was the first time that governments reported their actual levels of emissions. The quotas established for the firms participating in the ETS were based on estimates.

On the face of it, this is a rare bit of good news for the environment, given that global levels of CO2 are surging, fueling growing concern about the stability of Earth’s climate system.

The announcements, though, have the effect of unloading more sellers on the market. Analysts warn that a white-knuckle price ride could undermine confidence in what Kyoto’s supporters claim is the smartest and most flexible way to tackle carbon pollution.

“It would be premature to trumpet this as good news,” the Financial Times commented on Friday.

“For there is a strong suspicion that EU governments, of which at least 15 are on track to exceed their eventual Kyoto targets, are being too generous in awarding permits to their industries rather than the latter being unexpectedly successful in cutting pollution.”

An analyst for Point Carbon, an Oslo-based market monitor, cautioned that the six reporting countries account for only about a quarter of all EU emissions.

The big economies of Germany, Britain, Italy and Poland are among the other countries still to announce verified figures, the analyst said. The deadline for reporting these is May 15.

“Eventually it will sort itself out, and the market will adjust accordingly,” said the analyst, who noted that the market was introduced only in January 2005 and was still in a pilot phase.

Mr. Conil-Lacoste generally shares that view.

“The market has reacted healthily to fundamentals, albeit somewhat brutally,” he said. “However, an adjustment may be needed in the national quota allocations.”

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