This article is part of Nature's IPCC special

Allowances to emit one extra tonne of carbon dioxide in Europe during 2007 can now be bought for a song — €2.30 (US$2.99) last week — and all eyes are turning towards the second phase of the European Union (EU) emissions-trading system, which runs from 2008 to 2012.

Credit: SOURCE: EEX

Carbon futures for 2008 are being traded at €15 — down from almost €20 two months ago and sharply below last April's peak of €32.

Market-watchers say that the decline reflects steadily falling prices for natural gas. The resultant switch from coal to cheaper and cleaner gas by European electrical utilities has dampened demand for emissions credits, as companies grow confident that they will stay below their emissions caps. And on 30 November, the European Commission loosened restrictions on the number of credits that companies can obtain on the basis of emission reduction projects outside the EU.

As a result, phase-two allowances are selling for a lot less than the €20–30 predicted by London-based consultancy, New Carbon Finance, back in November.

But Guy Turner, an analyst at the consultancy, says that right now it is more important for the market to prove that it can operate successfully, than for it to attain a high price that will force emissions reductions in Europe. “Political integrity is more important than environmental integrity at the moment,” he says. “The EU needs to show the United States and China that it's possible to manage the process — that emission trading can be done and is a club worth joining.”