The European emission allowance market had collapsed during difficult economic times in 2006. Why hasn’t this happened from 2010 to now, under the apparently same scenario?

It is true that the price of emission rights in the European emissions trading system collapsed in 2006 and the market price was about zero until the end of 2007. And currently the price is quite stable at around €15.

I have added two pictures of the price development of emission rights at the bottom, one from phase 1 (2005-2007), the other from phase 2 (2008-2012).

Why that difference? Well, for starters, the price went to zero in 2006 not because there was an economic crisis, but because there were simply too many allowances in the market. The supply was too great compared to the demand. The demand for emission allowances at a price of zero was still greater than the supply of allowances. There was no scarcity and as you know the price of a good in a market is a signal of how scarce the good is.

And why was there an oversupply? That had to do with how the system worked with which emission rights were distributed. In the first phase (2005-2007) the individual EU Member States were allowed to choose how many rights they distributed to their own industry. And so most countries have generously provided their own industry with allowances for fear of losing competitiveness from their home industries. The EU Commission’s control over the distribution was weak and hence a large oversupply of allowances.

In the second phase (2008-2012) individual countries are still allowed to distribute emission rights to their industry, but now the EU Commission is watching much more closely. In other words, there is currently a scarcity of emission rights. This scarcity was less acute during the crisis of 2008-2009, but there has never been a real surplus of allowances in phase 2. Hence a positive market price. You can see in picture phase 2 that the price at the end of 2008 fell from €25 to about €10, but then rose back to €15.

And, just to reassure you, between 2013 and 2020 the EU commission will do the distribution of emission rights itself, the member states will then have nothing more to say about it. And the committee has already mapped out the path, there will be scarcity and a price of 30 to 40 €/ton CO2 is expected.

Kind regards