German emissions plan pushes up carbon prices

London, 20 April: Prices for carbon dioxide (CO₂) allowances in the EU Emissions Trading Scheme (ETS) have risen to record levels, driven partly by the publication of Germany's draft 2008–12 emissions plan.

On 12 April, Germany became the first major EU member state to publish hard numbers for its Phase II national allocation plan (NAP) – increasing market interest in 2008 vintage carbon dioxide (CO₂) allowance contracts, which are now trading at a premium to 2007 contracts.

The draft NAP - which sets out the targets faced by German installations for the 2008-12 phase of the EU Emissions Trading Scheme (ETS) – suggests that Germany will allocate 495.5 million allowances per year in Phase II, just shy of the 499 million allowances, each equivalent to one tonne of CO₂, it allocated in the first period 2005-2007.

However, Phase II includes installations such as chemical crackers that were previously excluded, making the comparable volume 485 million tonnes (Mt) and representing a 2.8%, or 14 Mt, decrease. And, while most sectors will receive allowances for 98.75% of their expected emissions, utilities will receive only 85% of their required volumes.

Combined with rising oil prices, the news helped push EU Allowance prices above €30 ($37)/tonne of CO₂.

"The cuts which happen in the second period are decisive, especially for energy companies which will have to take a big burden," says Patrick Weber, carbon trader at Dresdner Kleinwort Wasserstein, the investment banking arm of Dresdner Bank.

According to traders, the German NAP focused attention on trading in allowances for the second phase, and reversed the discount at which they were trading in relation to Phase I allowances. On 15 March, EUA contracts for '07 delivery were trading at €28/t, while '08s traded at €24/t. Yesterday, the European Climate Exchange's EUA contract for December 2006 delivery settled at €30.45, compared to €32.25 for December 2008.

The draft NAP is now open for public comment before it is due to be submitted to the European Commission at the end of June.

The UK government published its draft NAP at the end of March but, stung by its experience in the run up to Phase I, set out only indicative targets. It intends to reduce total CO₂ emissions in Phase II by between 11.0 and 29.3 million tonnes (Mt) a year against projected business-as-usual, and will allocate no more than 252 million allowances a year.

The UK was the first country to publish its NAP for Phase I, in which it set tough targets on industry, hoping to lead by example. However, almost all other EU member states then awarded generous allocations to their industrial sectors, and an effort by the UK to subsequently increase its allocation is subject to an ongoing legal dispute with the European Commission.

This is an edited version of a story that first appeared in Carbon Finance.

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