California carbon twice as expensive as European

The cost of carbon in California has risen sharply while the equivalent in
the European Emissions Trading System has so far gained little from
yesterday’s long-awaited reform proposals

London, 26 July 2012 – A reduction in regulatory uncertainty in
California, and concern about a nuclear power outage, have helped to push
the price of a carbon allowance in the US’ most populous state to more
than double that in the much longer-established European Union Emissions
Trading System.

The value of a California Carbon Allowance (CCA) for delivery in December
2012 closed at $19.50 per metric ton of CO2 equivalent (EUR16.04/tCO2) on
24 July, the highest closing price of the year so far. The price for
European Union Allowances (EUAs) for delivery in December 2012 closed at
EUR7.20/tCO2 on the same day.

The much higher price in California may be surprising to Europeans, given
perceptions about American reluctance to take action on climate change.
Ironically, the California scheme was almost derailed earlier this year by
legal action taken by an environmental action group (the Association of
Irritated Residents) who insisted that the scheme was not strict enough.

The price of EUAs has remained low despite the European Commission’s
release yesterday of its proposal for changes to auctioning volumes in
Phase III of the EU ETS, which begins in 2013. These changes, if approved
by both Parliament and the Council, would delay some of the auctioning
volume originally intended for the early years of Phase III, into the later
years. The changes were proposed by the European Commission in response to
widespread criticism that the price in the EU ETS is too low to promote the
necessary investments in clean energy.

In the long term, Bloomberg New Energy Finance expects prices in both the
Californian and EU ETS to rise significantly, since the emission reduction
targets in both parts of the world for the period beyond 2020 are likely to
continue to strengthen. At the moment the firm’s base case forecast for
the spot price of an allowance in 2020 in both markets is the same, at
EUR45/tCO2 ($55/tCO2). The fact that the forecasts are the same is purely
coincidental and belies significant structural differences in the two
markets; the EU ETS has access to the Kyoto market for international
credits whereas California does not; and the largest sector in the EU ETS
is the power sector while transportation is the largest emitter in the
California market.

Matthew Cowie, head of carbon market research at Bloomberg New Energy
Finance, commented, "While it appears that Europe has the political will to
give the EU ETS more teeth in the long term, the process of fixing the
problems continues to suffer delays. A month ago most market participants
thought that changes to the Auctioning Regulation could be in place by the
end of 2012, but most commentators now expect that this will take well into
2013 to accomplish. This market needs both ambition and structural
stability in order to regain its lost importance.”

Michel Di Capua, head of North American research at Bloomberg New Energy
Finance, commented, "After several failed attempts to introduce
cap-and-trade at the national level, there's a widespread belief that
carbon markets are dead in North America. Not so. We are on the verge of
seeing the emergence of a meaningful tradable market that over the long run
will transform California's power, industrial, and transport sectors. The
business community should take note; this market will impact some of the
country's largest utilities and some of the world's biggest oil and gas
players, among others."

Futures contracts for the California market have been trading since 2011.
Its underlying spot market is due to begin in 2013. The EU ETS saw the
first futures trading in 2003, and the start of spot trading in 2005.

For further information:
Matthew Cowie
Bloomberg New Energy Finance
+44 20 3216 4780
mcowie2@bloomberg.net



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