"After the Summer NAP: Waiting for the Wake-up Call?
After a long summer with limited progress on the National Allocation Plans (NAPs) for phase 2 of the EU Emissions Trading Scheme, all eyes are now on the European Commission. CERA's analysis indicates that the cap for phase 2 will most likely be 1-6 percent below that for phase 1, i.e., a 20 to 130 million ton cut compared with phase 1. Despite calls for harmonization and increased transparency, the hoped-for clarity is not forthcoming. This situation has a number of implications:
* Carbon dioxide (CO2) price volatility can be expected. As the EU Commission's reactions to phase 2 NAPs are published, the thinly traded market could overreact.
* Negotiations among the Commission, governments, and industry associations may result in some changes to the rules of the trading game. Adjustment mechanisms such as price caps could be required to reconcile conflicting interests if the Commission truly desires to have governments endorse meaningful emissions reductions.
* The power sector will likely bear most of the emissions reduction effort, as governments have been cutting sector allocations to handle the controversial impact of CO2 on power prices. Even under regulated tariffs, power companies will have to buy part of their allowances, resulting in a higher pass-through of CO2 prices.
* Project-based credits could be a safety valve to ease the European carbon constraint in phase 2. If project-based mechanisms generate volumes of carbon credits larger than the need for emissions reduction in the European market, such credits could be in a position to set the market price on the European carbon market in phase 2."
