The price of European Union (EU) allowances for carbon dioxide emissions has steadily declined over the past six weeks, reaching an all-year low of less than €8.50 (US$11.11) last week.

Credit: EUROPEAN ENERGY EXCHANGE

Even optimists are now having doubts about whether the market will recover again during the rest of the first phase of the EU's emission trading system, which finishes at the end of 2007. Most companies participating in the system own enough allowances for next year, and large energy producers have lost interest in backing the market by buying more allowances than necessary. As a result, analysts say, prices may go further downhill.

“Given the surpluses, the price should in theory approach zero,” says Stefan Kleeberg, who watches energy markets for 3C Climate Change Consulting in Frankfurt, Germany.

The poor outcome of the United Nations' climate summit in Nairobi has not exactly stirred euphoria among emissions traders. Nonetheless, analysts reject the idea that the trading system might collapse altogether. “The books are closed for 2006 and 2007,” says Kleeberg. “But questioning the efficiency of the system as such would be wrong.”

Emissions allowances for the second trading period, from 2008 to 2012, are currently traded at around €17, meaning that the difference between phase I and phase II prices is at its largest ever. Reports last week that the European Commission will reject Germany's national allocation plan for 2008–12 — effectively demanding tighter caps on Europe's largest emitter — fuelled demand for phase-II allowances at European carbon exchanges.