Pollution Market Collapses -- But Without Triggering Concern Among Experts

May 30, 2006 — By Arthur Max, Associated Press

BONN, Germany — A new commodity burst onto trading markets a year ago, heralded as a key ingredient in the effort to curtail climate-changing greenhouse gases. That item was carbon permits -- the right to pollute -- and it soared from zero to a US$10 billion business.

Then the market crashed.

Carbon prices lost 70 percent of their value in a few days late last month. If it had happened to gold, copper or sugar futures, it might have triggered a world panic.

But no one -- neither the traders nor the people who invented the trading system -- seemed overly concerned. If anything, they were pleased.

"It is evidence that the market forces are working," said Edwin Aalders, of the International Emissions Trading Association, which speaks for more than 100 European companies.

"This is a blessing in disguise," said Stephen Singer, of the Worldwide Fund for Nature, or WWF. It showed that the market is a "sound, economic and effective way to deal with environmental problems."

The collapse came when it was discovered that the European Commission had miscalculated the amount of carbon permits that industry would use or trade. Supply outstripped demand, and when year-end figures of emissions allowances released this month showed a leftover surplus, prices went into free-fall.

By coincidence, the crash happened days before the United Nations convened a session in Bonn of the Framework Convention on Climate Change, where carbon trading was created and enshrined in the landmark Kyoto Protocol that came into force in February 2005.

But it barely caused a stir among the delegates of 189 countries attending, said Janos Pasztor, of the U.N.'s Climate Change Secretariat.

"There's nothing wrong with the system, but obviously there's still some work to do in the EU countries," he said on the sidelines of the conference.

The convention ended Friday with an agreement to continue the Kyoto model for reducing greenhouse gases after the protocol expires in 2012.

The Kyoto Protocol is an agreement among 36 industrial countries to reduce emissions of carbon dioxide and five other gases that scientists say trap the earth's heat. Many climatologists believe global warming may already be responsible for the growing frequency of hurricanes and floods, and for a variety of natural events like melting glaciers and the bleaching of the oceans' corals.

The Kyoto accord, which the United States rejected, set mandatory targets to cut emissions, with an overall goal of pumping 5 percent less carbon into the atmosphere by 2012 than in 1990. The European Union accepted an 8 percent cut.

In Europe, 10,500 factories were told how many tons of carbon dioxide they could emit, setting limits that -- ideally -- would require them to install new technology or use energy more efficiently.

Since not all industries could adapt quickly, those that couldn't meet their target were allowed to buy permits from those that cut emissions more than required and had a surplus to sell.

A freewheeling market developed, with trading exchanges to facilitate deals among industries with too many or too few units. Companies factored the permits into planning their energy costs.

The system appeared to collapse as the European Commission's first-year figures showed it had allocated too many credits -- 44.1 million metric tons went unused of the allocated 1.83 billion tons, or about 2.4 percent.

"The verified emissions were much lower than expected, and therefore there was this reaction," said Artur Runge-Metzger, chief of the commission's climate unit.

Peter Koster, a trader on the Amsterdam-based European Climate Exchange, said the price of a metric ton of CO2 emissions fell from euro30 (US$38.40) on April 24 to about euro10 (US$12.80) three days later, and hit a low of euro9.30 (US$11.90) on May 12. "There was huge volume and huge volatility," he said.

Prices have since recovered to euro19.10 (US$24.40).

The commission says it not entirely to blame.

As a startup project, the allocations were largely guesswork. The amount of actual emissions also were affected by favorable variables -- a mild winter, good rains in the north that boosted hydroelectricity and the rise in oil prices that were an incentive to save fuel, said Runge-Metzger.

Singer, the environmentalist from WWF, faulted the overallocation of units on the companies, which inflated emissions estimates. The allocations in each country were parceled out by its government, which came under heavy lobbying from the industries to set high ceilings.

"Governments were cheated by the industries. They were given the wrong numbers," Singer said in an interview.

But 2005 is being seen as a pilot phase, and there's time to make corrections, he said. The allocations will be more firmly based on experience when they are apportioned for the crucial period of 2008 to 2012.

The question remains whether the system is helping industry reduce greenhouse gas emissions, or whether companies are just shuffling around money and carbon permits.

Germany claims to have cut emissions by 4 percent, and some progress was made in the Netherlands, Britain, Sweden and France.

"It would be unfair to say nothing has happened," said Singer. But the gains "are dwarfed by the overall business-as-usual emissions" in most of Europe.