Green projects face carbon credit crunch

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Clean technology projects such as wind farms are facing a new threat — a sharp fall in the price that firms pay to pollute.

The cost to companies of buying permits allowing them to release waste carbon into the atmosphere has fallen to a third of what it was eight months ago. This makes environmentally friendly projects less attractive compared with schemes that emit more carbon.

This weekend the government was forced to admit that the system was suffering since the price of carbon credits collapsed. It said other incentives would be needed to persuade firms to cut emissions. Ed Miliband, secretary of state for energy and climate change, said in an interview with The Sunday Times: “The carbon price alone is not enough; you also need to provide support for new technologies.”

The minister promised to introduce a “stimulus package” for the development of carbon capture and storage within the next few weeks.
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Some environmental groups want the government to go further and lead the way in replacing Europe’s ¤67 billion (£59 billion) carbon-trading market — which allows producers of carbon gases to buy and sell the permits to release carbon — with a system of straight taxes on carbon emissions.

All high-polluting European industries such as steel and energy producers are required to use carbon credits — one credit allows them to release one tonne of carbon dioxide. Companies are given an annual quota by the government but this is set below their requirement so they always need more. The idea is to make them pollute less or to buy credits from other businesses that have cut their emissions. Companies that have not used up their quotas can sell any surplus allowance.

Last year this system looked as though it would work well because carbon credits were trading at more than ¤30 a tonne. However, since the economic slowdown began, demand for credits has dried up as companies reduce their output. Many big companies are now selling unused credits to raise money. As a result they cost only about ¤10 per tonne.

Environmental groups say the price has now fallen too low to encourage firms to use cleaner fuels or technologies.

“As the price of carbon credits falls, energy companies will see it as a sign that the cost of coal is superficially cheaper,” said Kirsty Clough from the World Wildlife Fund’s climate-change policy unit. “This runs the risk that they will not switch to gas or invest in renewable energies.”

The slump in the value of carbon credits may boost the chances of more coal-fired power stations being built. About 75 such stations are being proposed across the EU — six of them in Britain.

The cost of carbon credits is likely to fall lower as the recession continues.

The decline in emissions will help to reduce global warming, but if this leads to the shelving of offset projects — where firms invest in green schemes to counter their carbon output — the implications could be severe.

“The carbon market simply is not working on a very basic level,” said Oscar Reyes of Carbon Trade Watch, an independent research group. “It is a flawed system. It doesn’t encourage investment in renewable energy. It encourages traders to play the market and buy the right to pollute.”