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EC CO2 data shows that EU carbon trading is working: analysts


By Frank Watson


April 11, 2011 - Recent 2010 carbon dioxide emissions data released by the European Commission show that Europe's flagship tool to limit industrial CO2 emissions is working, according to carbon analysts.

Even though CO2 emissions regulated by the EU Emissions Trading System increased in 2010 from the previous year, when seen against greater hikes in power demand and industrial output, the figures show that the scheme is achieving its purpose: to gradually decouple carbon pollution and economic growth.


The increase in emissions was less than the overall increase in industrial output (7.4% y/y) and the increase in power demand (2.6% y/y growth), with the latter being a testament to the gradual but continued greening of power generation across the EU," said Barclays Capital senior carbon analyst Trevor Sikorski in a research note April 4.


The numbers did confirm a number of trends that we expected - good growth in metals output translated into a 22% growth for that sector, while most others logged growth in emissions around the 2% level," he said.    


The EU ETS regulates CO2 emissions from around 12,800 power plants and factories across the 27-member EU, plus non-members Norway, Iceland and Liechtenstein.


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Companies regulated by the scheme are given a certain amount of free carbon allowances -- with the intention that this amount is below their actual historical emissions.


Companies must have their CO2 emissions independently verified by auditors and report their numbers to the European Commission by March 31 each year. They then have until April 30 to hand over to the EC enough carbon allowances or offset credits to match their verified emissions, if necessary making up any shortfall by buying credits from those with a surplus. (See related chart: Partial verified 2009/2010 emissions data for EU Emissions Trading System)


The EC -- the scheme's architect and regulator -- reports an incomplete data set each April 1 showing each installation's CO2 output and free allocation of allowances, followed by subsequent updates through to May 16.


EU CO2 emissions rise 3.3%


A Platts analysis of data released by the EC April 7 shows that, on a like-for-like basis, overall EU ETS CO2 emissions increased by 3.3% in 2010 from the previous year, based on figures reported from 10,677 plants, from a total of 12,802 listed, or 83% of the total.


If applied to 2009 total emissions of 1.879 billion mt, the 3.3% hike indicated by the partial 2010 data would suggest a final 2010 figure of 1.942 billion mt.


Analysts say the figures show that while the power sector had a shortage of allowances in 2010 as intended, this was by far eclipsed by an oversupply of credits held by non-power industrial companies, leaving the scheme net long on allowances overall.


BarCap esimates that the 2008-12 Phase II period of the scheme is net long to the tune of 440 million metric tons of CO2 equivalent allowances.


This level of underlying length is the biggest bearish factor in the emissions market," said Barcap's Sikorski.


However, the fundamental state of the market has been known since the impact of the financial crisis became apparent," he said.


While BarCap is heavily involved in emissions trading, Sikorski's views were also echoed by independent market observers, who note that the EU ETS is proving adept at achieving its goal, albeit at a pace that some environmental groups find frustratingly slow.


Carbon analyst Matteo Mazzoni at Italy-based independent energy and research company Nomisma Energia said there is now little doubt that the EU ETS is greening Europe's economy.


Electricity production in 2010 rose by 4% whereas emissions only rose by 1.8% compared to 2009 levels," he said in an interview April 8.


It is evident that this sector must have implemented energy efficiency measures," he said.


In 2010, production from the non-power industrial sector was up by 7% from 2009, while [this sector's] emissions rose by 6%," he said.


The limited decoupling of emissions in the non-power sector was linked to the large surplus of allowances held in the sector, which Mazzoni estimated at 180 million mt.

"I can assume that a suplus in emissions allowances is not the ideal incentive to motivate industries to invest in efficiency and reduce emissions," he said.


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