The price of carbon credits crashed by more than a half last week after European countries said their levels of pollution would be less than expected.
The price of carbon dioxide fell from just over €30 (£21) per ton to close at €13.45 on Friday over market fears of a glut of unwanted carbon credits.
If prices remain this low, companies will have less incentive to cut pollution levels. It would also threaten to render one of the cornerstones of the EU's policy to cut carbon dioxide emission levels almost impotent.
The rout was sparked by the announcements from France, the Netherlands, Estonia and the Czech Republic that their heavy industry had polluted less than expected last year.
All 25 European Union countries participating in the emissions trading scheme must report last year's emission levels by 15 May. If other countries also announce lower than expected levels, the price of carbon will continue to plummet. The UK has yet to report.
The scheme, launched last year, is designed to give companies an incentive to cut pollution and to punish those that do not.
Each country must agree annually with the EU a national "allocation" of pollution levels for heavy industry. Households, transport and light industry are excluded from the scheme.
In turn, each heavy industry company is given an individual pollution target. This should be lower than its previous pollution level.
If it exceeds this, it must buy in carbon credits to balance its books. Those companies that pollute less than their individual targets can sell the surplus on to the market.
Companies do not have to settle their carbon dioxide accounts for several years. This means that if countries are polluting less than expected, there will be less need to buy in credits, causing the price to fall, just as it did last week.
The scheme has been beset by problems. The UK Government has taken the EU to court over the method by which its allocation was set.Reuse content