Europe needs carbon price to be ‘ten times higher’, says IEA

A carbon price signal ten times higher than current market levels is needed to incentivize European investment in low carbon technologies, the International Energy Agency said.

The IEA’s economist and director of global energy economics Fatih Birol told conference delegates in London that reform is needed for the flagging emissions trading system (ETS) to boost prices to levels from around €6 per metric tonne of carbon emitted to around ten times higher.

The price of carbon emissions allowances on the European Union’s ETS market remains under heavy downward pressure due to an over-supply of 2 billion allowances following the steep decline in demand due to Europe’s economic recession.

A financial incentive is needed to decarbonise power generation to bring forward the estimated $1.6 trillion of investment needed for Europe, Birol said. The need for new investment is driven 34 per cent due to rising electiricty demand and 66 per cent to replace power plants that are due to retire, he added.

In response to the carbon price crash, the UK government has implemented a mandatory ‘carbon price floor’ which is currently set at GBP9.55/mt of carbon emitted, and is paid by generators in addition to the EU ETS allowances.

Critics of the scheme claim that the price floor unfairly disadvantages UK industry compared to European companies which pay only the weak ETS price.

The UK’s ambitious decarbonisation targets could also prove to be a handicap if it exists outside of a global agreement on tackling climate change, said uSwitch.com’s director of consumer policy Ann Robinson.

At a panel discussion in the same conference Robinson said she “went ape” over reports that the UK should show leadership in reducing carbon emissions, saying any targets should be part of a global agreement.

“Why handicap ourselves?” she said.

EDF Energy’s director of strategy and corporate affairs Paul Spence said that although there is reason to be optimistic about a global agreement on decarbonisation, this is easily undermined by events such as Australia abolishing its carbon tax regime.

“We need to decide how much we can expect, how brave we can be collectively and how brave the UK can be within that,” Spence said.

EDF Energy operates the UK’s nuclear fleet, giving it a strong foundation of low carbon generation capacity, and have supported the UK’s carbon price floor. Spence told the conference the move is a “practical and realistic step forward”.

Earlier this week the Department of Energy and Climate Change called for the cancellation of the ETS’surplus allowances before 2020 to “help restore the balance between supply and demand” and increase the carbon price, which in turn would encourage investment in low carbon technology.

Decc said it is also considering the proposed Market Stability Reserve, a mechanism proposed by the European Commission in January which would withhold allowances from being auctioned when there is a high surplus in the market and re-inject them when the surplus is lower.