Europe's failure to raise carbon prices enough to spur green energy use means more nations are expected to follow the example of Britain and take action on their own.
EU efforts in the
immediate term are focused on a Feb 19 vote in a committee of the European
Parliament which will provide the next signal of whether a plan to bolster the
EU's Emissions Trading Scheme can proceed.
Even if agreed, analysts
predict it will be years before European carbon prices rise to the level of at
least 40 euros ($53) that analysts say is needed to spur investment in
That's good news for intensive energy users and
coal-burners, but bad for governments committed to 2020 environmental targets
for which they need to bolster green energy use.
A positive vote next
week would give an indication of whether the European Union has the political
will for deeper reform needed over the longer term.
It would then require
further debate among member states and a plenary session of the European
With or without action, analysts say the market's weakness
means national initiatives will proliferate, running counter to the pursuit of a
single EU energy market.
"Fragmentation is something we have already
seen. The latest example of fragmentation is the UK," said David Hone, climate
change adviser for Royal Dutch Shell, regarding Britain's decision to establish
a carbon price floor from April.
"We will see more and more of this. It
will be a progressive process. It's a process that has started."
European Commission last year proposed a plan to temporarily remove some of the
huge surplus of carbon permits that has weighed on prices.
It hoped for
agreement before the start of the 2013-2020 third trading phase of the carbon
market but German indecision and Polish opposition have helped delay a decision
while adding to market uncertainty.
Coal-dependent Poland has been openly hostile to market
intervention and Germany so far has avoided taking a stance.
Germany needs a higher carbon price to spur its shift to renewable energy,
Chancellor Angela Merkel faces an election and industry pressure to avoid action
that might raise energy prices.
The chief executive of Germany's largest
utility E.ON , which has supported the idea of removing some carbon permits from
the market, says a minimum CO2 price or a tax might be necessary, though a
reformed EU ETS would be preferable.
chosen to introduce a carbon price floor from April to give more certainty to
clean energy investment.
It works by topping up the EU carbon price when
it falls below the floor. Starting at around 16 pounds ($25) a tonne, it will
rise to 30 pounds by 2020.
This compares with the current EU carbon price
of around 4 euros a tonne and an average 10 euros seen by 2020.
floor will cost British utilities almost 800 million pounds ($1.25 billion) in
2013-14, according to analysts at Thomson Reuters Point Carbon. These costs will
probably be passed on to domestic and industrial customers.
carbon price floor makes it too expensive to burn coal, meaning still cheaper
coal for the rest of Europe. While British emissions should fall, for Europe as
a whole, there would be no improvement, further showing the need for
pan-European and global carbon pricing if emissions are to be cut.
absence of a reliable EU-wide framework, utilities say they are forced to look
to emerging markets outside Europe.
Within the EU, they have closed
cleaner gas capacity because coal is cheap to import and the negligible carbon
price provides no incentive to use the lowest carbon option.
first time, the energy sector is closing power plants, not for reasons of
obsolescence, but for economic reasons. This has never happened before," said
Jean-Francois Cirelli, president of gas industry body Eurogas and vice-chairman
and president of GDF Suez.
"If there is no intervention, the system is
clearly dead. We will have to switch to another system, taxing CO2, but will it
be at EU level?," he said.
An EU-wide carbon tax proposed in the 1990s
failed to materialise because of lobbying from industry and the difficulty of
getting the EU as a whole to agree.
Several EU nations, however, have
introduced energy taxes at least partly based on carbon content, including
Denmark, Finland, Germany, Ireland, Sweden and Norway. France failed to pass a
bill for a carbon tax in 2009.
Last year, Italy proposed replacing the
ETS with a carbon tax and its environment minister described the ETS as
The scheme is nevertheless expected to stay as it would be
very hard to dismantle and even Poland, the arch-opponent of higher carbon
prices, has not called for it to be scrapped.