Cheap Carbon: Permit Prices Tank, Threatening Clean-Energy Projects

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In the wake of the financial meltdown, markets are under fire everywhere, kind words from President Obama notwithstanding. The meltdown and falling prices is hitting one arena especially hard: the carbon market.

After a record year in 2008, prices for carbon-emission permits in Europe have collapsed. They’re now at about 11.6 euros, down 60% from their summertime highs. Carbon prices are falling, in large part, because of the economic slowdown and a fall in industrial output; shuttered factories emit less pollution, meaning companies have an easier time meeting emissions targets and need to buy fewer permits on the open market.

Falling carbon prices isn’t necessarily a bad thing. For big utilities, like Germany’s RWE, it’s good news because it reduces their cost of complying with Europe’s increasingly tough carbon caps.

But a lower carbon price does one negative side effect: It stifles investors’ interest in clean-energy projects in the developing world.

That’s because prices have also plummeted for carbon-emission reduction credits generated by putting up wind farms in Mongolia or by cleaning up steel factories in India. Those carbon permits, known as CERs, are now flirting with record-low prices of about 10 euros. Project developers who put clean energy projects in the developing world sell the emissions credits to companies, especially those in Europe, that need to buy those credits to comply with environmental regulations. Since CERs are usually cheaper than conventional credits, companies can use them to meet part of their emissions-reductions targets.

But many of those project developers–like EcoSecurities, Camco Global, and Climate Change Capital–are getting squeezed. Market prices for emissions-reductions credits are so low, they make it unattractive in many cases to go to the trouble of putting together a clean-energy project in the developing world.

Reuters noted that clean-energy developers are even fleeing China, the world’s biggest market for projects under the Kyoto Protocol’s so-called clean development mechanism.

And because depressed carbon prices are due to the depressed economy, carbon-market experts expect this state of affairs will continue for another year or two. The market turmoil adds to all the other criticisms of the clean development mechanism, like a cumbersome approval process that many finance types say discourages big investment in the developing world.

That means that climate negotiators converging on Copenhagen at the end of the year can add one more big job to their list: Find a way to make clean energy a winning proposition for both the developing-world and the rich-country companies that need to finance it.