Fears over carbon emissions after permit prices dive

The global carbon market shrank by more than a third to €61bn (£49bn) in 2012, the lowest level in its five-year history, fuelling concerns that key permit schemes designed to force down CO2 emissions are proving ineffective.

The amount that energy-intensive companies were forced to pay to compensate for their CO2 emissions tumbled by 36 per cent last year, as the value of the permits they need to buy once their carbon footprint hits a certain level dived from a worldwide average of €11.20 a tonne to €5.70, according to Bloomberg New Energy Finance.

The cost of the permits tumbled as the debt crisis in Europe – by far the biggest part of the so-called carbon market – exacerbated what was already an excess of supply created by an overly generous allocation of free permits in the EU when the scheme formally kicked off in 2008.

The over-allocation means large industrial European companies are collectively sitting on a €4.1bn surplus of free permits that they could sell while still meeting their forthcoming emissions targets. This is pushing down the price of a tonne of carbon when it needs to be rising to better incentivise companies to cut their emissions.

Donald MacDonald, chairman of the Institutional Investors Group on climate change, said: "The carbon price looks much too low – an effective carbon market needs a realistic price. We need intergovernmental action to increase it."

Guy Turner, of Bloomberg New Energy Finance, expects the global carbon market to increase to €80bn this year and, in 2014, to last year's record of €96bn, helped by new carbon trading schemes in California and Australia and, potentially, an EU proposal to postpone some of its planned allowances of new permits.

In the UK, new legislation will put a "carbon price floor" on emissions, initially £16 a tonne, rising to £70 by 2030.