The price of carbon allowances for the second phase of the European Union's emissions trading scheme, which runs from 2008 to 2012, has fallen to less than €20 from a late-May peak of €25.

Credit: EEX

Under the scheme, emissions trading credits are bought and sold — mainly by energy utilities — at five carbon exchanges, including the European Energy Exchange (EEX) in Leipzig, Germany. Analysts around the world are watching the market closely to see whether it will provide a stable and effective model for global trading in carbon emissions.

They attribute the latest price drop (see graph) to a new technical development. Some businesses are swapping so-called Certified Emission Reductions (CER), generated by approved clean development projects in poor nations, for European trading allowances, leading to a surplus of the latter on the market.

CERs certify a specific amount of avoided emissions rather than granting permissions to emit extra carbon dioxide. Until recently, businesses were wary of them, because of doubts over whether the projects would deliver emission reductions that could be verified. But Stefan Kleeberg, a carbon asset manager with the 3C Group near Frankfurt, Germany, says that confidence is growing in the projects that are actually approved by the European Commission under the CER scheme.

Trading regular allowances for CERs, which are still 10–20% cheaper, has thus allowed some businesses to profit from emissions trading. However, the market is not yet very transparent, Kleeberg says, with only a handful of companies and brokers aware of its possibilities.