By
Kent
Moors
:
A s we wait for a clear indication of what the European Central
Bank ((ECB)) intends to do - or, perhaps more accurately, what
European political realities allow it to do - yet another crisis
has emerged.
This development strikes at the heart of an essential cog in the
European energy strategy. How this one plays out may actually tell
us more about recovery prospects on the continent than any action
from the EU in Brussels.
On Friday, the Danish Energy Agency released some of what
analysts in the region had surmised for a while. The agency is a
lobbying group emphasizing EU policies affecting both energy
producers and consumers. Its director of EU affairs Ulrich Bang
declared in an email that the European Commission (EC, the
administrative arm of the EU) had to take immediate action to
protect the internal energy market within EU states.
At issue here is the carbon trading system, what most observers
acknowledge is the "cornerstone" of the inside energy balance among
the 27 EU countries. Bang said that the system has "almost
collapsed," a view widely shared by other European-based
specialists.
The statement testified to a rising strain in the energy sector
resulting from the push and pull of an ongoing credit crunch on the
one hand and sluggish economic recovery prospects on the other.
Carbon trading sits smack in the middle of this tug of war. And
its inability to generate adequate pricing may be the clearest
indications yet that there are new problems forming.
This is the world's largest cap-and-trade program. It has become
a barometer for levels of investment in market production
infrastructure and a projection of expected prospects for
manufacturing and consumption. It sets up an overall level of
emissions permitted for the EU as a whole and then regulates the
trade of carbon credits between companies. Low-polluting
enterprises sell their excess "emission allowances" to more
polluting factories - but for a price.
A cap-and-trade program allows companies to trade emission
levels, in effect moving pollution allowances from more efficient
operations (who do not need the credits) to less efficient ones
(who do). This has been a primary mechanism for bringing companies
into EU policy parameters, and thereby integrating into a wider
European market former Eastern European factories that had operated
within environmentally unfriendly situations.
The credit transfer, which provides time for those who are
falling below EU standards and new investment capital for those who
are exceeding standards, helps offset pollution. As productivity
levels increase, the more efficient operations tend to realize a
better return on capital invested. Until recently, the trade
cap-and-trade system had subsidized the main producers in Europe
and stimulated an overall EU economic uptrend.
Not anymore.
A good indication of staggered EU economic prospects is the
lower price commanded by the carbon credits. The price goes down
when there are declining incentives to sell the credits. Simply
put, if the market participants don't see the potential for selling
manufactured goods, there are fewer reasons to sell the credits.
This is an especially telling indicator in Europe, where the credit
sellers will maximize capital, and the buyers will be able to use
lower production costs to improve bottom lines.
The recent figures released by the market are not encouraging.
The credits fell to a record 5.99 euros ($7.77) per metric ton in
April, and permits for December were level at 7.80 euros on the
London futures exchange on Friday. In contrast, four years ago, the
price was about 30 euros per ton.
The major loser in such depressed prices is investment in
alternative energy projects favored by environmental movements (and
EC plans). "Based on [the price of carbon credits], not much money
will be invested in green technology," Bang concluded.
Yet without the ability of moving credits from lower carbon
emission sectors (which occurs when the credits are sold by better
energy utilizing companies), the further application of alternative
energy becomes more limited. Low credit prices produce such a
result.
The EC has as its overarching goal the creation of a single
regional electricity and gas market by 2014. Low carbon prices,
combined with a series of other problems, make this a remote
prospect, the Danish lobby group said.
However, that objective is compounded by the current political
situation. "The EU's internal energy market is in a state of
crisis," Bang said. "Member states do not comply with directives,
while constantly introducing new subsidy mechanisms that distort
competition."
Bang further noted that the EU's internal market is often
presented as the bloc's biggest success story over the past 20
years. However, a political environment has now put a strain on the
further collective pursuit of energy policy. Perhaps understating
the case, Bang added, "There is a long way to go before we have an
internal electricity and gas market in the EU."
At least in the short-term, as the carbon credit market goes, so
goes the chances for a unified European energy space.
Disclosure:
None
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