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Green Europe Imperiled: Debt Crisis Triggers Carbon Market Collapse

The European sovereign debt crisis that’s spread from Greece to Italy and is roiling the region’s banks now has another potential victim: energy policy.

European emissions permits, needed by polluters from utilities to cement makers for each ton of the carbon dioxide they put in the atmosphere, slumped to their lowest in 2 1/2 years on Oct 4. An auction of permits by Greece, trying to avoid the euro area’s first default, worsened a glut of permits, UBS AG analyst Per Lekander said last week.

Lower carbon prices discourage European utilities including EON AG and GDF Suez SA from investing in wind farms and solar plants that don’t need permits. The industry needs to spend as much as 900 billion euros ($1.3 trillion) by 2020 to meet a target of getting 20 percent of power from renewable sources, Citigroup Inc. estimates. The economic slowdown is adding to carbon permit supply as manufacturers and generators sell permits unneeded by idle factories and power plants.

“The thing that will most kill renewable development is low carbon prices,” said James Cox, an analyst at energy consultant Poyry in Oxford. “If the Eurozone crisis continues that will lead to an extremely low carbon price and it makes it difficult to invest in low-carbon generation.”

Carbon permits for delivery in December fell to 9.82 euros a metric ton last week, the lowest since February 2009 and a 46 percent drop from May’s year-to-date high. That compares with the 16 pounds (18.50 euros) price floor the U.K. has suggested is necessary to ensure investment in low-carbon generation.

‘Doesn’t Encourage’

Today’s “price level does not encourage investments in low-carbon energy generation capacities,” EON spokesman Georg Oppermann said by phone from Duesseldorf. “Companies will only invest if they can expect higher prices in the future.”

The European Union cap-and-trade system, which puts limits on more than 11,000 utilities and manufacturing companies across the Union’s 27 members, started in 2005 and is now in a second phase that ends in 2012. In the third stage starting in 2013, the majority of power plants will be required to purchase all their carbon permits.

The system is the cornerstone policy to meet a binding target to cut carbon emissions 20 percent from 1990 levels by 2020. The Union may seek to cut carbon release by as much as 95 percent by 2050.

‘React Better’

“We have seen similar price developments during the first wave of the economic crisis in 2008,” Daniel Kluge, a spokesman for Germany’s BEE renewable energy lobby, said in a telephone interview. “The emissions trading system needs to be adjusted to be able to react better to the expansion of renewables and short-term economic developments.”

The U.K. is one country that is looking at ways to remove carbon-price uncertainty from investment decisions. Britain, which plans to install more than 8,000 offshore wind turbines by 2020, has proposed a range of measures including a carbon floor price of 16 pounds ($24.50) a ton starting in 2013, rising to 30 pounds by 2020.

“The current volatility of the price of carbon is indicative of wider issues within the electricity market that need to be addressed,” Electricite de France SA’s U.K. division said in an e-mailed statement. The price floor will “begin to restore the carbon price signal to what was originally intended by creation of the EU emissions trading scheme.”

‘Urgent Action’

Europe must take “urgent action” to prevent further declines in carbon prices, according to Graeme Sweeney, Royal Dutch Shell Plc (RDSA)’s vice president of Future Fuels and CO2. He recommended withholding some carbon permits in the next phase of the program starting in 2013 to ensure that prices were high enough to encourage low-carbon investment.

A program to finance carbon capture and storage projects that bury emissions underground may run afoul of the plunge in carbon prices, PricewaterhouseCoopers LLP said. The EU plans to help fund carbon capture sites and other renewable energy investments with money raised from the sales of 300 million permits from a reserve in the next phase of the carbon trading program.

The drop in carbon prices means the storage projects, more expensive than most renewable investments, may not get the funding they need, said Jonathan Grant, London-based assistant director of sustainability and climate change at PwC, the management consultant.

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