A second carbon windfall

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The European carbon market – the largest in the world by some considerable margin – is having its second price meltdown in three years as European industries find themselves once again with more carbon credits than they need.

The cause this time is not just blatant over-allocation – as it was in 2006 – but the biting effects of the economic downturn, which is reducing manufacturing output by up to 14-15 per cent in some areas.

This is having the perverse effect of delivering yet another windfall to those parts of European industry that receive free permits.

According to market analysts, these industries have been selling excess credits at the rate of some €150 million per week over the last two months. Some in the EU might like to think the companies are reinvesting these windfalls into clean energy or energy efficiency projects, but that seems unlikely in the current market.

The flood of credits into the carbon trading market has caused the European carbon price to slump by two thirds from its northern summer peak of €31 to its current levels of around €11. Some analysts tip it to fall as low as €5 or €6.

This will not quite be the disaster produced a few years ago when the carbon price fell dramatically to less than €1 when it was suddenly realised that European countries had put their hands up for more carbon credits than they needed.

But it does highlight the fraught nature of the carbon market when it is manipulated by government handouts, and the perils of relying on a carbon price as the sole mechanism to forge a retooling of the economy to clean energy.

At such a low carbon price, investors in clean energy projects within the EU and in those countries involved in the United Nations-sponsored clean development mechanism (CDM) are simply walking away. They are finding it hard enough as it is to raise finance for such projects. A low carbon price simply doesn’t invite any interest.

Though clear at the time of the release of the White Paper on the government’s Carbon Reduction Scheme, it now appears to be widely accepted that the carbon price envisaged by the Australian government is nowhere near enough to drive investment in clean energy – be it of the kind and scale to protect the future of the coal industry or to encourage large investment in new energy sources such as solar, tide and geothermal.

The Australian carbon scheme offers a carbon price that may cause company boards to reflect, but not high enough to compel them to act. Though an important start, that is of itself simply not good enough.

Australia – like other OECD countries – will need to offer a portfolio of incentives and tax breaks, regulation and direct investment of the sort being envisaged by the Obama regime and already implemented at least in part in various European countries.

Just one example of this is the solar PV market in the US. Tax incentives and feed-in tariffs have underpinned sharp growth in countries like Germany and Spain, and it appears an eight-year extension of the US governments investment tax credit, tariffs, state regulations, and improvement in energy efficiency and cost competitiveness, and technological advancements such as thin film replacing silicon, is going to see massive increase in investment in coming years.

According to the US-based Emerging Energy Research, solar PV capacity may surge from 217Mw at the end of 2007 to as much as 3,900Mw by the end of 2012, attracting investment of more than $US20 billion.

It predicts total solar PV capacity by the end of 220 could top 37,000 Mw, as utilities start large scale projects, motivated as much by their need to protect their residential and commercial businesses as they are by state-based mandates, the volatility of fossil fuel prices and declining cost of PV.