CO2 Emissions Trading Financial Crisis Drives Down Price of Pollution

As the economic effects of the financial crisis deepen, it has become surprisingly cheap to pollute. Prices for carbon dioxide emissions permits have fallen below 12 euro per ton. Some companies are selling them to generate much needed cash.

The ongoing financial crisis, as has become clear in recent weeks, is bad for both budgets and business. It is also, it turns out, bad for the environment.

Emissions trading certificates have recently become much cheaper.

Emissions trading certificates have recently become much cheaper.

Prices for carbon dioxide emission certificates in Europe have fallen drastically in recent weeks as companies have slowed down production to keep pace with falling demand. In addition, some companies have begun selling their certificates as a way of generating much needed -- and otherwise difficult to obtain -- cash. The result has been an oversupply of emissions certificates that has driven the price down below €12 ($15.58) for every ton of CO2 emitted. As recently as last summer the price was close to €30 ($38.94) per ton.

Such a low price is concerning for two reasons. On the one hand, it removes the incentive for companies to make improvements aimed at cutting back their greenhouse gas emissions. The idea behind the European Union Emission Trading Scheme is to create a financial disincentive to pollute. Analysts say that a price per ton of emissions of at least €20 is necessary before it becomes cost effective for companies to install environmentally friendly technology.

On the other hand, higher prices for CO2 emissions certificates mean a greater motivation for factories to switch from coal to natural gas for their energy needs. If pollution is cheap, there is less of a reason to convert to the cleaner-burning fuel.

The EU ETS, as the European Union's CO2 permit system is known, is currently in its second trading period, the first having ended at the end of 2007. Factories are given emissions allowances for several years at a time for free -- the current period runs until 2012. Should they emit more than their allotted permits allow, they are required to buy more permits on the open market. Should they pollute less, factories can sell their unneeded permits. The plan foresees a gradual elimination of free permit handouts toward a system in which all permits are auctioned off.

Currently, though, the permit market -- with banks still reluctant to lend money -- has proven itself a way for some companies to generate some much needed liquidity. A recent survey conducted by the Financial Times Deutschland shows that a number of mid-sized companies in Germany are selling CO2 emissions permits to fill financial holes. Indeed, the FTD even describes the case of the paper factory Scheufelen in southwestern Germany which managed to avoid a complete collapse by selling the majority of its pollution permits in December.

The low price of the permits is likely to mean that companies will delay technological improvements and run older, less efficient factories for longer. The result will be greater emissions than would have been the case were permit prices higher.

cgh -- with wire reports


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