NATURE|Vol 441|25 May 2006

405

BUSINESS

On the closing Friday of Carbon Expo inCologne earlier this month, a crowd ofnervous emissions traders was seen

swarming around the stand of a German con-sultancy firm.

The focus of their attention was an analystwho had managed to log on to a supposedlysecure European Commission website. The sitelisted verified data on carbon dioxide emis-sions from thousands of large companies. Thecommission was due to release these market-sensitive data the following Monday, 15 May.

As reports spread that power producers andother energy-intensive European industrieswere sitting on unused allowances for 60 mil-lion tonnes of carbon dioxide emissions, theprice of the permits that allow for extra emis-sions dropped by nearly a third . Traders’ reac-tions to the leaking of the data varied from“unbelievable” to “a complete farce”. Only thearrival of the weekend, they said, saved themarket from a complete meltdown.

When the commission officially announcedon 15 May that large industrial firms in theEuropean Union (EU) were in fact just 44 mil-lion tonnes under the permitted limit for 2005,the market decided that the crisis wasn’t quiteso bad. It settled somewhat, at about half itsApril peak.

The commission later apologized for the“technical error”. But the incident summed upthe immaturity of the EU Emissions TradingScheme (ETS), a cap-and-trade system intro-duced in January 2005 with the goal of cuttinggreenhouse gases. The world looks to the ETSas a possible model for a global trading system,and is watching its progress with interest.

Accidental emissionsThe leak wasn’t the first of its kind: late lastmonth, prices of emission allowances crashedfrom €31 (US$40) to around €12, followingleaks of emissions data for France, the Nether-lands, Sweden, Spain, Belgium and the CzechRepublic. Most of these countries reported significantly lower emissions than had beenforeseen by their respective national plans.

Not all countries have come in below target:British companies emitted 33 million tonnesmore carbon dioxide than they were allowed.The excess will put particular pressure on emit-ters in export-dependent sectors such as thesteel industry, which cannot readily hand on the

cost of buying permits to their customers. Thelargest emitters — electricity generators —probably will hand on such costs, but they’renot happy about it: five British firms are suingthe European Commission, claiming that theUK allocation is too small.

Across the EU, however, over-allocation ofemissions rights in the first trading periodseems to be the biggest threat to the ETS.

“If the price of carbon is too low, it will hin-der investment in cleaner technologies,” saysMartina Priebe, who watches the ETS for theInternational Emissions Trading Associationin Geneva, Switzerland. “In the worst case thewhole cap-and-trade exercise will have noeffect at all on investment decisions.”

For the system to work properly, the totalnumber of allowances allocated to industryneeds to be smaller than the actual emissions,agrees Barbara Helfferich, aspokeswoman for the Euro-pean Commission. But shesays it was difficult to estimatethe right baseline because dataon past emissions levels didn’texist. Instead, the commissionused data on past energy consumption andprojected economic growth rates to estimateallowances for the 11,500 installations coveredby the ETS.

The 25 EU member states must submittheir national allocations for the second trad-ing period, 2008–12, by the end of June. Thesecan now take into account verified data and

will be adjusted accordingly, says Helfferich.“The commission acted on the cautious

side,” says Guy Turner, director of London-based New Carbon Finance. “This is under-standable because they knew that excessivelyhigh prices would have been disastrous.”

Volatility may be a problem for investors butit is typical for young environmental com-modity markets, such as the one that success-fully controls sulphur dioxide emissions in theUnited States. And although the ETS marketmay have fallen, it is still functioning.

“Emissions trading works,” says PeterKreuzberg, head of trading at the Germanenergy company RWE. He notes that highmarket volume and liquidity have beenachieved quickly. But he adds that the ETSreporting system needs to be strengthened andits allocation process made more transparent.

These flaws must be addressed ifthe scheme is to help the EU meetits target of reducing industrial car-bon dioxide emissions to 6% belowcurrent levels before 2010. “Theperformance of the ETS stacks upwell against most criteria,” says

Turner. “The only thing it has not yet done isreduce emissions.”

“The system is not a failure despite whathas happened in the past few weeks,” saysPriebe. The commission can’t control themarket’s value — but, she says, it needs to dofar more to control the quality of data thatunderpin it. ■

Carbon market survives gas leaksSearing volatility has led some to dismiss Europe’s nascent emissions market as a farce — but it is still hanging in there. Quirin Schiermeier reports on the project’s teething troubles.

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