But - despite sensationalist headlines in a number of European newspapers warning of the scheme's imminent collapse - the official responsible for the scheme has declared himself pleased with its first few weeks of Operation, and most observers dismiss questions over the scheme's long-term viability as scaremongering.
"For the first time, an incentive has been created for companies to reduce carbon dioxide [CO2] emissions, and to extract value from reducing emissions," Peter Vis, acting head of the Commission's industrial emissions unit, told Environmental Finance.
He added that, in the run-up to the scheme's launch in January, many companies across Europe have begun monitoring their emissions for the first time, and the ETS has forced governments to assess their progress towards their 2008-12 greenhouse gas targets under the Kyoto Protocol.
However, environmentalists have pointed to a 25% slump in EU allowance prices, between I and 10 January (see page 30), as evidence that governments had been over-generous in setting targets for industry, and raised concerns that carbon prices may be too low to encourage companies to invest in emissions reductions.
"If you look at the price development, it's a sign that we're more or less right with our analysis of the [member states'] 'national allocation plans' [NAPs]," says Oliver Rapf, senior policy officer at conservation group WWF in Brüssels. "The whole System should be about delivering emissions reductions - relying on over-allocation will not get us anywhere."
But most emissions trading specialists are sanguine about current relatively low prices, and expect pressure on companies
affected by the scheme to increase as time goes on. "The scheme is working if companies are trading to cover their positions," says Lee Solsbury, practice leader for energy and climate at consultancy Environmental Resources Management. "My clients are focused on CO2 emissions in a way they never have been before." He says it is "far too early" to speculate on the direction of prices, but notes that - while there is continuing uncertainty over allowance supply from out-standing NAPs (see box) rates of economic growth and potential new emitting facilities could put upward pressure on prices.
Markus Hüwener, a managing director of 3C - a specialist consultancy spun out of Germany's Dresdner Allianz financial group -is more bullish. "These are very attractive levels" at which to buy allowances. "The market will definitely go higher from here," he says, claiming his clients in Germany are concerned that they will be short of allowances by 2007, and they expect much tighter targets in the second phase, which begins in 2008.
The launch of the scheme has led to intense speculation about the degree to which 'fundamentals' are affecting carbon prices. Some argue that changes in the relative prices of gas and more carbon-intensive coal are driving allowance prices, as electricity generators - which account for around 75% of allocated allowances - switch generation, either consuming or freeing up allowances. Others have pointed to recent heavy rainfall in Scandi-navia boosting emissions-free hydro generation and depressing allowance prices.
"We're seeing fractions of the bigger picture," says Benedikt von Butler, at broker Evolution Markets in London, noting that, while Scandinavian rainfall was followed by local generators selling allowances, a cold winter in Spain has had no effect on demand from Spanish generators for allowances. "At the moment, there's still huge regulatory uncertainty" from the outstanding NAPs, he adds.
Martin Collins, managing director of origination and brokerage at Natsource, adds that ongoing wrangling over trading contracts - with at least three different versions in circulation - is preventing many potential participants from trading.
"We're seeing many corporates still struggling to get contracts in place," agrees Anthony Hobley, at law firm Baker & McKenzie in London. "But we're beginning to get more clarity on day-to-day issues, such as tax, accounting and contractual issues. That's the whole purpose of the early - that is, pre-Kyoto - Start of the EU ETS." Nonetheless volume figures have climbed dramatically. Consultant Point Carbon reports volumes of more than 5 million tonnes of CO2 in January - more than double the previous monthly record.
Mark Nicholls, Environmental Finance, Feb. 2005
