'Fiascopenhagen' leads to uncertainty on CO2 markets

At the exchange for the carbon emissions allowances, which are traded as part of the European Union's Emissions Trading System (ETS), prices of carbon dioxide emissions dropped to approximately €12 per metric ton. To put in perspective: in the summer of 2008 the emission permits reached a high of around €30. Note that these were the prices of futures traded at the most liquid carbon exchange ECX (the European Climate Exchange).

In Europe, over two billion emission allowances are being issued annually. It is to be expected that the United States will (annually) issue approximately five billion emission rights from 2012. Referring the current prices, it is easy to see that the CO2-(allowance) market is a multi-billion dollar business.

The European Union's Emissions Trading System is a so called cap-and-trading system, which aims to limit European industrial emissions and eventually force companies to pay for allowances to offset their emissions. In other words, energy efficient companies producing less carbon dioxide, will be 'rewarded'. Efficient companies might even be able to sell redundant allowances. Meanwhile, companies which are excessively making use of fossil fuels, thus causing more carbon dioxide emissions, will be punished. The higher the prices of CO2 allowances, the more expensive it will be for companies.

Carbon quotas

In Europe, for a certain period, a number of carbon emissions allowances are being granted. The current trading period expires at the end of 2012, when the Kyoto-protocol expires. Anticipating on the 'post-Kyoto era' between 2013-2020, the European Union decided in 2008 to reduce greenhouse gases by up to 20% compared to 1990.

The environmental and progressive wing of Europe hoped for an even larger reduction, going up to 30%. Because of the disappointing outcome of the Copenhagen summit, upward price driving effects faded. Because of the fact that important players like the US and Japan did not restrict themselves to carbon reduction goals, extra pressure and uncertainty were put on the current CO2 market and also on the future CO2 market.

In June, the House of Representatives in the United States of America (finally) passed a climate change bill based on creating a similar cap-and-trade system as the European Union. The proposed US system would also, as in Europe, limit industries' emissions and eventually force companies to pay for allowances to offset their emissions, when being inefficient.

Delicate balance

With the current world wide economic situation, it is no surprise that the UN climate talks ended in a fiasco. Governments have other problems to tackle and are being more focused on how to kick start the economic engine. The US, China and Japan are not really wanting to (unnecessarily) hold back their economies further. However, climate sits at the centre of all future debates.

Current leader Europe may be setting a good example by restricting itself voluntarily, but it may also shoot itself in the foot, hurting the economy. It is a challenge to find a balance between a good global environment and economic growth. Like the economy, climate is also not restricted by national borders. Therefore countries are tied to each other, whether the governments like it or not.