The price of carbon allowances for phase two of the European Union emissions-trading system reached a three-month high last week, after the European Commission decided to cut Poland and the Czech Republic's plans to allocate allowances for carbon-dioxide emissions for the 2008–2012 trading period.

Credit: SOURCE: EEX

The commission will now permit Poland to hand out allowances of 208.5 million tonnes per year to its installations, which is 27% less than it asked for. The approved annual allocation to the Czech Republic is 86.8 million tonnes — 15% less than requested. France's national allocation plan — 132.8 million tonnes — was approved without cuts.

Power plants and other large installations can buy emission allowances on the market if they want to exceed their CO2 caps. An allowance to emit one extra tonne of CO2 during 2007 costs little more than €1 (US$ 1.33) because most installations own more allowances than they will need. But given the reduced caps for the second trading period, carbon futures for 2008 are now being traded at more than €17 — up from a low of €12 in late February.

“As from next year, there will likely be shortages,” says Stefan Kleeberg, who watches carbon markets for 3C Climate Change Consulting near Frankfurt, Germany. “As a result, phase-two allowances could sell for €20–50 in the next months.”