After steadying in the summer, prices for European Union allowances for emissions of carbon dioxide have dipped precipitously in the past two weeks, to less than €12 (US$15) for a tonne of emissions.

Credit: SOURCE: EUROPEAN ENERGY EXCHANGE

According to carbon-market analysts, the drop reflects recent falls in oil and gas prices. These encourage electricity generators to switch from coal to natural gas, whose more efficient burning produces less carbon dioxide. The fuel switch has lowered the demand for emission allowances traded at five European carbon exchanges, including the European Energy Exchange in Leipzig, Germany (see chart).

But Nils Medenbach, an emissions-trading specialist at the Frankfurt-based consultancy 3C Climate Change Consulting, says the low prices also indicate that many energy companies think they already have enough allowances to cover the first period of the carbon-trading scheme — which lasts until the end of next year.

As the year draws to a close, and industries get a better picture of their overall 2006 energy use, large facilities throughout Europe are also tending to sell options rather than buy them, says Milo Sjardin, an analyst at the London-based New Carbon Finance.

Some analysts think that demand for allowances will continue to slip. “You may want to sell now,” says Sjardin. “Unless industrial production suddenly increases to very high levels, or drought leads to a dramatic drop in hydropower supply, prices may go down to €5 by the end of the year.” Prices are higher, however, for the next trading period, from 2008 to 2012, and market volume remains healthy, dispelling suggestions that the trading scheme is failing altogether.