ICF International Warns of Further Volatility in EU Allowance Emissions Market
EU Emissions Trading Scheme Entering Crucial Period of True Price Discovery
May 1, 2006 -
Last week, several European Union (EU) member state governments began publishing their compliance reports of verified emissions from installations covered under the EU Emissions Trading Scheme (EU ETS). So far six countries, representing 28 percent of emissions, have reported and all are required to do so by May 15, 2006. In response, the price of EU Allowance (EUA) was cut in half from more than 30 euros/tonne to around 15 euros/tonne, causing some implications for participants in the carbon market.
"Contrary to some media reports, ICF International believes that recent EUA price developments indicate the market is working exactly as it should. The market is responding to clear signals of lower than forecasted emissions in the few countries that have reported so far," said Abyd Karmali, Managing Director of ICF International's London office. "The key unknown for the market is whether the high EUA price in recent months has stimulated some emissions abatement in industry sectors, or whether the lower reported emissions are purely the result of companies successfully gaming the allocation process. From our own experiences working on climate strategy with several large emitters, we believe that companies are indeed uncovering innovative ways to reduce emissions but there also has unquestionably been some over-allocation to the industry sectors given the lax methodologies used by some governments in their National Allocation Plans."
"In our view, there will still be an overall shortage in the market at the end of the first trading period because the European power sector has experienced a significant increase in the spread between natural gas and coal prices," added Kim Keats, Director of power and fuels in London. "The overall shortage in the power sector should still outweigh any net long position in the other industry sectors. Based on our experience of other cap-and-trade emission control schemes, we have consistently warned market participants to expect prices to remain volatile during this first phase of the EU ETS as immature markets tend to be hypersensitive. Price and quantity discovery will take time."
About ICF International
ICF International (Nasdaq: ICFI) partners with government and commercial clients to deliver consulting services and technology solutions in the energy, environment, transportation, social programs, defense, and homeland security markets. The firm combines passion for its work with industry expertise and innovative analytics to produce compelling results throughout the entire program life cycle, from analysis and design through implementation and improvement. Since 1969, ICF has been serving government at all levels, major corporations, and multilateral institutions. More than 1,800 employees serve these clients worldwide. ICF’s Web site is http://www.icfi.com.