After slumping to prices that had made it a near-laughing stock, the European Union's carbon market, the Emissions Trading System (ETS), has been given a useful boost by, of all things, oil. In the last three months, the cost of buying a ton of carbon dioxide (CO2) has raced upwards by more than 25 percent, according to Paris-based carbon bourse BlueNext. Damien Demailly, in charge of the energy and climate program with green group WWF-France, says the hike has been driven by electricity producers who have turned away from gas, whose price is indexed on oil, in favor of coal. Coal is cheaper than oil but also produces more CO2 per watt. As a result of the switch, producers are emitting more CO2 and thus are having to looking more and more to the ETS, buying allocations to meet their quotas, he said. “This is why carbon traders keep an eagle eye on the spread between coal and gas prices,” he said. The “spread” is the term for the gap in prices between these commodities. The upturn is welcome for the world's biggest commercial carbon scheme, which was born in a blaze of publicity in January 2005 with the goal of helping EU members meet their commitments under the UN's Kyoto Protocol. The ETS works under a cap-and-trade principle. It comprises 11,500 big industrial firms whose CO2 and other emissions of greenhouse gases are stoking global warming. Each firm is given a quota, and face a penalty of 100 euros (159 dollars) for every ton of CO2 that they emit above this ceiling. Those who are below their quota can sell any surplus to those who are above it. In theory, this financial carrot-and-stick should encourage a carbon cleanup by everyone. In the first 18 months of its life, that did indeed seem to be the case, and ETS prices went from strength to strength. But the problem was that this was only the first, experimental phase of the system. In mid-2006, it emerged that the quotas issued to participants by national governments, and based on preliminary estimates, were far greater than the pollution that was actually emitted. As a result, the market was flooded with surplus quotas, and CO2 that in February 2006 was flying high at 30 euros a ton could be bought a year later for little more than one euro. In January this year, Phase 2 of the ETS came in, with tougher quotas and higher penalties after the provisional period, and the white-knuckle rollercoaster ride, for the time being, seems to be over. CO2 contracts were trading in a narrow range of over 26 euros on Thursday. Thierry Carol, deputy managing director of BlueNext, a company jointly owned by NYSE Euronext and France's state-owned Caisse des Depots bank, said that market movements were driven by short-term factors other than the price of fossil fuels. “All you need is a cold winter or a summer heatwave to cause (electricity) production problems and people start turning to coal-fired plants” to meet demand, he said. Carol said the biggest problem weighing on the market was what will happen after 2013, when the current quotas expire under Kyoto. Also unclear is when, or even whether, the United States will launch its own cap-and-trade system after the departure of President George W. Bush, and how this would dovetail with the European market __
