Slide in carbon prices gives firms less reason to reduce emissions

In a fresh blow to the discredited EU Emissions Trading Scheme (ETS), carbon prices have fallen to their lowest level ever, reducing the incentive for companies to cut pollution levels.

In the middle of this month, the price of a ton of carbon on the spot market fell below €3.50 (£2.30) for the first time, recovering slightly to close on Friday at €3.80.

The EU launched the ETS in January 2005 to give intensive users of energy, such as manufacturers and power generators, incentives to cut their carbon emissions. Each company is given an annual allowance setting out how much carbon it can emit. If the company exceeds this cap, it has to buy in carbon credits, traded on the ETS, from participants that have polluted less than allowed.

But the recent slump has undermined the purpose behind the ETS. Analysts now estimate that UK companies could save up to €1.5bn (£990m) when they buy the credits they need to balance their books, if prices stay this low for the rest of the year.

Companies can carry over any surplus or deficit of credits to the next financial year, when the first phase of the scheme ends. This means that many delayed buying credits in 2005 and 2006, when prices were €18 per ton on average.

Veronica Smart, from consultancy firm EIC, said traders were worried that too many companies had a surplus rather than a shortage of credits and would dump them on to the market. "I'm not sure the EC will be happy about it."

She said recent falls in oil and gas prices had also contributed to a slide in carbon prices.