Despite the budget cuts to the UK's Department of Energy and Climate Change (DECC), at £85 million, energy security will get attention from the new coalition government. One of the reasons for the confidence, according to a spokesperson at DECC (in a phone interview on May 26, 2010), is the announcement of the Green Bank. Moreover, holders of carbon credits handed out by the European Union under the legislated trading scheme, EU ETS, will get a floor price - the first such policy of its kind.
According to DECC (from a phone interview on June 2, 2010), a carbon credit floor is intended to provide greater certainty to carbon markets. That price needs to be low enough to consider the impact of increased costs to consumers and high enough to encourage investment in clean technologies. They would not confirm any timeline for an announcement.
But the carbon market is operating in a shifting dynamic of economic and political uncertainty.
Carbon Markets are Here to Stay
Harry Beamish, emissions trader at the FSA regulated broker CarbonDesk says that an ideal price would be at around €30 per tonne, twice the current value, in a phone interview on June 2, 2010.
He said: "The UK government had looked at a floor price below the current trading price of €15, however has recently backtracked on this plan. The impact of a floor price at these lower levels is definitely up for debate.”
He also says that in the next two years higher emissions reductions targets will come into play; European entities within the EU ETS may be at risk of being less competitive in the international arena if there is no legislative protection or universal climate agreements. He does not expect any clarity of the overall situation in the next few months but thinks one thing is certain, the market is here to stay.
And global financial institutions have taken notice. Latest acquisitions include the $600 million buy-out of an American carbon market by OTC market operator ICE, an exchange where half of the world's crude and refined oil futures are traded, and Barclays Bank bought a Swedish company that specialises in supplying carbon offsets.
Meanwhile, trading activity is breaking records. According to a monthly report from the London-based European Climate Exchange (ECX) for May 2010, almost 700,000 contracts traded representing a year-on-year increase of 60 percent. According to ECX (in a phone interview on June 8, 2010), the scheme includes 5,000 energy and industrial plants in the UK. While many of the world's major financial installations serve as liquidity providers and intermediaries - investment banks, hedge funds, trading houses and brokerages.
Will the UK Meet Its Carbon Budget?
Companies are budgeted for a number of CO2 units by governments, denoted as an EUA, that they have a right to emit. There are approximately 250 million EUAs in the UK, which is approximately 10 percent of the total in circulation for all 27 member states.
DECC published their energy and emissions projections this month and, according to the report, are expected to meet a mandated carbon emissions budget by 2020.
They have announced that part of the strategy to meet that budget will be to purchase more EUAs. The report states: "This increase is due to higher emissions projected from the traded sector due to changes in the projected electricity generation mix."
But at what price will they be making those purchases?
James Anderson, director of strategic and sustainability services for AMEC Earth & Environmental UK, says that it is still early days for speculation on a floor price, since it would need to be considered within the context of other EU markets and the establishment of the US cap and trade system in the next couple of years. But he does think a floor price needs to happen.
He adds that the best way to help businesses be part of carbon reduction is to give them confidence in the markets. (Interview by phone on June 8, 2010)
Anna Reitman - Anna Reitman is a journalist currently working and residing in London, UK, having completed an MA in international journalism (print).
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