By Michael Szabo
LONDON (Reuters) - Carbon markets are vital in the fight against climate change, and "inherent" volatility and spikes in permit prices are drivers of innovation rather than signs of manipulation, traders told UK policymakers on Tuesday.
In a House of Commons (parliament) Environmental Audit Committee meeting on the role of carbon markets in preventing climate change, three emissions trading executives defended their business and the $120 billion emissions market as the most cost-effective way to achieve a low-carbon global economy.
"Price spikes (in carbon permits) are what cause innovation," said Louis Redshaw, head of emissions trading at Barclays Capital, citing new technologies developed following soaring crude oil prices in the 1970s.
Carbon dioxide (CO2) emission permits under the $90 billion European Union's Emissions Trading Scheme have traded between 8 and 30 euros in the past 12 months, volatility which some attribute to speculation rather than supply and demand dynamics.
"Volatility is inherent in this market," Redshaw said.
"A low carbon price is fantastic news, because it shows we're achieving our objective. If the price is high we shouldn't be afraid of that either, as long as every country has a similar cost for emissions (to ensure fair competition)."
Some observers blame speculators like hedge funds for driving prices up to 30 euros last July, while others said cash-strapped firms selling excess permits this year and borrowing from their next year's quota were responsible for pushing prices down to 8 euros in February.
Under the EU scheme, greenhouse gas emissions from heavy industry are capped and governments give companies free permits, which can be sold by installations that have made CO2 cuts.
An EU climate plan agreed in December will see a majority of permits, called EU Allowances, auctioned to industry from 2013. The agreement also calls for a steady reduction in the EU's emissions cap through 2020, providing industry with a clearer long-term view on their environmental commitments.
Redshaw said unnecessary market volatility can be eliminated through measures like regulatory clarity and permit auctioning.
Carbon prices ultimately affect power prices, as generators often pass the cost on to consumers through energy bills.
In most Western European countries, where electricity is traded over markets, analysts say EU Allowances can account for around one fifth power prices.
Permit prices have nearly doubled since bottoming in February, trading up to a 4-month high of 16 euros on Monday.
MANIPULATION AND "DODGY ACCOUNTING"
In the United States, historically the world's biggest polluter, President Barack Obama is pushing Democrats to hammer out a climate and energy bill to include a domestic carbon trading scheme to help cut emissions by 83 percent by 2050.
Opponents of emissions trading argue it is too complicated to implement and it can be open to price manipulation.
Analysts expect the U.S. market to cover 6 billion tons of carbon dioxide, triple the size of the EU market.
"It's difficult to find players who could move a market of this size," said Merrill Lynch's Abyd Karmali, who is also president of the Carbon Markets and Investors Association.
Others say a carbon tax would give more long-term certainty for companies on their emissions costs than carbon trading can.
"A carbon tax is just as susceptible to dodgy accounting as carbon trading," Redshaw said.
All three agreed that although effective, emissions trading should not be viewed as a savior solution.
"The problem of climate change is very hard to reach with a single instrument, so it's wrong to see carbon trading as a panacea," said James Cameron, executive director at environmental investment managers Climate Change Capital.
For additional news and analysis on the global carbon markets, go to http://www.communities.thomsonreuters.com/carbon
(Editing by James Jukwey)
