Mar

26

Recession lowers cost of EU Emissions Trading Scheme by a half

Filed Under Carbon Markets, Carbon Trading, EU ETS 

According to the latest analysis by New Carbon Finance, lower economic
growth forecasts have reduced the cost of meeting the 20% reduction target
for the EU Emissions Trading Scheme by 2020 by around a half. In fact, the
cost of meeting the 30% reduction target is now less than last year’s
prediction of the cost of meeting the 20% reduction.

The European Emissions Trading Scheme imposes targets for reductions in carbon dioxide
emissions from large installations in the European power and heavy industry sectors. The
European authorities have agreed to emission reduction targets on 1990 emissions by 2020
of either 20% without a collective international agreement on reducing emissions, or 30%
reduction if other major countries follow suit and an international agreement is signed.
In summer 2008, New Carbon Finance ran its model of the European Emissions Trading
Scheme with GDP forecasts available at that time to determine the total cost of complying
with the 20% targets. 

We have now rerun the model with the latest forecasts of GDP for the 27 European countries
covered by the scheme. The results are significant:

The deteriorating prospects for European economic growth over the next few years have
significantly reduced our forecast of emissions in the EU ETS with our forecast coming
down on average by 7% compared to our forecasts of June 2008.

This means that less abatement is needed to meet emissions targets. According to our
analysis demand for abatement in the EU ETS over the period 2008 to 2020 has
contracted by 32% compared to last summer’s assessment.

As a consequence our price forecasts have also come down as have total compliance
costs. Our average EUA price up to 2020 is now €40/t compared to a price using last
June’s GDP forecast of €55/t.

The total costs of meeting the reduction targets for the EU ETS by 2020 are now 50%
lower compared to the results from using last summers’ GDP projections. We estimate
that the recession has reduced the cost of meeting the 20% reduction target up to 2020 by
€157bn and the 30% target by €203bn.

Our current estimate of the cost of meeting a 30% reduction target for the EU ETS by
2020 is now less than last year’s estimate of achieving a 20% reduction target by 2020.
The falling cost of compliance with emissions reductions targets could have important
implications for future climate change negotiations.

Guy Turner, director of New Carbon Finance, said: ”The results from our analysis show that it
is now far easier for developed economies to commit to emission reduction targets previously
thought of as too stretching.”

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