BRUSSELS, Jan. 28 (UPI) -- A sharp drop in carbon allowance prices is a "wake-up call" showing European Commission reforms need to be implemented, the European Union's climate action chief says.
EU Commissioner for Climate Action Connie Hedegaard reacted with dismay Thursday as prices for carbon allowances on the bloc's open market Emissions Trading System plunged to all-time lows following a move by a key European Parliament committee to reject her proposal to "backload" 900 million EU allowances.
Hedegaard in November proposed to push the European Union Allowances into the latter end of the new, seven-year phase of the ETS beginning this month, making fewer allowances available in the short term in a bid to prop up faltering prices.
But European Parliament's Industry, Research and Energy Committee voted down the proposal Thursday, 42-18 with 11 abstentions, sending the EUA prices to an all-time low of $3.75 per metric ton of CO2 equivalent -- far below the $30-$50 necessary to prompt polluters to invest in greenhouse gas-reducing measures.
"On a day where the carbon price at some point went below ($4) it must be clear to all that when the commission warned that the ETS price could drop dramatically, it was not a false warning but a real possibility," Hedegaard said. "This is not the time to put the commission's back-loading proposal on the backburner."
On the contrary, she asserted, "this should be the final wake-up call both to governments and to the European Parliament."
Under the EU ETS, heavy industries, energy companies and other air polluters can purchase allowances to emit greenhouse gases above their allowable quotas, which, if expensive enough, can persuade them to make the changes necessary to cut emissions levels.
The free-market ETS system has been shown to work when demand for the allowances are high but due to financial crisis and resulting economic slump, European industrial activity has slowed, dampening demand for the allowances.
That, in turn, has caused the formation of surpluses, sending prices for the carbon allowances tumbling well below the level needed to persuade industrial buyers to reduce greenhouse gas emissions.
"Everyone knows that the political discussion over the structural options will take time," the EU commissioner said. "The recent events show that something has to be done urgently.
"I can therefore only appeal to the governments and the European Parliament to act responsibly and support the back-loading."
The alternative to letting the ETS collapse would be a patchwork of national standards that would create "up to 27 different systems and taxes instead of one market creating a level playing field internally in Europe."
The market intervention proposed by the commission is opposed by industries heavily dependent on energy use and coal-dependent countries such as Poland, which cite the higher energy it would produce at a time when the European economy remains weak.
Despite last week's events, some analysts said the ETS is unlikely to disappear, even though utilities hedging against higher future prices are now the only reliable buyers of EUAs.
"I think the risk is fairly small of it being scrapped," Trevor Sikorski, head of environmental market research at Barclays Capital, told the British energy analysts ICIS Heren. "I do not see a majority of member states wanting to take this out.
"The risk seems more that the ETS becomes somewhat low-key for awhile before policy makers decide to give it something to do."