Germany and Poland add to emissions-trading gloom

By Emily Smith

Date: 18/05/06

Volatility on Europe's carbon trading market seems set to continue because of uncertainty over the use of emission allocations in Poland and Germany.

The EU's Emissions Trading Scheme (ETS), has been in turmoil since early this month when it emerged that several countries had over-allocated carbon-trading permits.

A European Commission report published on 15 May showed that last year companies were allowed 44 million tonnes more carbon permits than they needed.

The EU scheme, launched on 1 January 2005, allows EU industrial installations to buy and sell carbon-trading permits.

Early indications that several countries had over-allocated led to a market crash, and prices have remained volatile since Monday's official announcement.

Further complications lie ahead. Three countries - Cyprus, Malta and Poland - have not yet submitted their emissions data, and information from Italy is still incomplete.

All four countries are expected to have over-allocated permits.

Poland's silence is however causing the biggest worries. Andreas Arvanitakis, senior analyst at market analysis company Point Carbon, said Poland's emissions were a "really big deal with the potential to sink the market".

Roughly 8% of the total emission permits allocated under the ETS went to Polish industry and as yet there is no sign of data from Warsaw.

A Commission official on Monday said infringement proceedings could be launched against tardy member states.

An environment department spokesman said that it was too early to predict when the Commission's patience would run out. But she added that countries could find themselves in court "if they don't come forward with something soon".

Germany meanwhile has created its own share of market uncertainty by threatening to claw back its unused permits - in effect slashing emiss-ion allowances halfway through the first trading period 2005-8.

Germany says it should be allowed to set aside the excess permits to cover new power installations.

Berlin is already involved in a legal battle over the Commission's refusal to let Germany build annual adjustments into its original national emissions allocation plan.

The spokesman said the new German proposal would "normally not be allowed". "It is another type of adjustment; we are looking at it closely," she added.

A Commission statement said that lessons learned from the first year of trading provided "an excellent factual basis for deciding upon the caps in...forthcoming national allocation plans for the second trading period [2008-12]"

Fortis market analyst Kris Voorspools said over-allocation of trading permits in all 25 countries would set tough second round standards.

He said: "I get the impression most governments are not too happy at the moment. They feel they have been tricked by industries predicting they would use too much carbon and now cashing in on the surplus.

"I'm not sure what will happen in the second round, but I'm sure countries will be taking a more severe look at allowances."

He added that traders would not welcome adjustments by the German government - or anyone else - before 2008.

"The market is opposed to meddling. It needs clarity and clear-cut rules that can't be changed."

Article reports on complications with the EU's Emissions Trading Scheme (EU ETS) for greenhouse gas emissions. A European Commission report published on 15 May 2006 showed that in 2005 companies had been allowed 44 million tonnes more carbon permits than they needed. Author says that uncertainty over the use of emission allocations in Poland and Germany added to the complications.