With the slowdown in the EU economy and the large volume of free allowances, Europe's cap-and-trade scheme (EU ETS) for greenhouse emissions (GHG) has resulted in a price of carbon of €7 per tonne of CO2 equivalent, so low that there are doubts about whether the scheme will have any significant impact on GHG emissions. For comparison, in Australia the carbon price, which is not yet market determined, has been set initially at A$23 per tonne. Some argue that the fundamental problem is that the EU ETS is schizophrenic because it should be either a purely market-based process with the free interplay of the supply and demand for the benefit of the environment or a market intervention policy designed to stimulate structural industrial change.
In the third phase of the ETS starting in 2013, at least half of all allowances will be auctioned. For industries such as electricity generation, no allowances will be allocated free of charge, all will be auctioned. However, some other sectors with a significant risk of carbon leakage will continue to receive allowances for free.
Last week the European Commission (EC) issued a proposal to address the current situation of a glut of allowances. The EC is proposing changing the timing of allowances auctions in phase 3 of the EU ETS, so as to avoid flooding an allowances market which is already glutted. Because of the macroeconomic developments in the last few years years, the idea is to postpone allowance auction volume from 2013-2015 to the end of phase 3. After the proposal was announced, the price of carbon dropped further to €6.70, suggesting that the proposal is not foreseen to be able to effect a major change in the ETS.
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