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Fate of carbon markets does not lie in UK hands alone - PwC

Tuesday 9th February 2010

By Mike Jones

The Environmental Audit Committee report on "The role of carbon markets in preventing dangerous climate change" has warned that the EU Carbon Market is "failing to deliver vital green investment", and called on the Government "to consider measures that would guarantee a minimum price for carbon".

Commenting on the report, Richard Gledhill, partner and head of carbon market and climate change services, PricewaterhouseCoopers LLP, warned that while the recommendations of the committee were ambitious, the challenge for UK business, and the London markets' role in the global emissions trading system, was that many of the really important issues could not be decided by the UK alone.

He said: "Carbon markets are being helped by improving economic fundamentals, but the disappointing outcome of Copenhagen is undermining longer-term prospects in the carbon offset market, and the market is seeing less new project activity.

"A 30% reduction commitment from the EU would push the price of carbon higher and send a strong message to business for low carbon technology development and investment."

Currently London plays a dominant role in the EU and global Emissions Trading System markets worth £75billion last year, but uncertainty following Copenhagen has challenged confidence in the market and investment in new projects. During the hearings, the committee heard calls for a carbon price of €100 a tonne of CO2, or higher, to drive urgently-needed investment in green technologies and energy efficiency.

Gledhill said: "Carbon prices have been languishing in the low teens for the best part of a year. Higher prices are needed to incentivise investment in many technologies. But higher prices aren’t the only factor. Confidence in the market and in climate policy is also important. Uncertainty over the level of ambition in the EU and internationally and the delays in the climate negotiations aren’t helping here.

"If you talk to traders and market theorists, they will argue against price floors, saying markets work best without intervention, in this case delivering emission reductions at the lowest cost. But carbon markets also need to incentivise long-term investment.

"Reserve prices in auctions would create an effective price floor and could help to reduce the potential for big price swings, and are worth exploring to provide stronger incentives for investment in low carbon generation. But you would need to apply these across Europe, not just in the UK. Encouraging investment in new energy sources is needed to alleviate security of supply concerns, and to ensure we are not embedding high carbon energy infrastructure into our energy supply for the long term."

The Committee’s report and analysis were "pro-business and pro-investment" according to PwC, but that alone may not provide the boost in confidence London markets need post Copenhagen, with the long term regulatory framework on climate change still unclear.

Gledhill said: "Understanding the issues doesn’t drive investment alone. It is policy that counts: long, clear signals to business that will underpin confidence, help bankability and deliver results.

"The Copenhagen Accord called for US $ 100billion a year of funding to be mobilised to address the needs of developing countries by 2020, and it is clear that our leaders are looking to carbon markets to make a significant contribution to this. But unless we can resolve the policy uncertainties quickly, it is difficult to see this level of ambition being delivered.

"There is a strong case for more ambition all round - the pledges to date under the Copenhagen Accord get us only half way to a low carbon pathway by 2020. But does it make sense to make a unilateral move, ahead of the US and the big developing economies? To some extent this depends whether you worry more about the need for the UK to win the 'green growth' race or about the competitiveness in energy intensive technologies."

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