BRUSSELS The Europe Union's carbon market could be flooded with excess permits over the next decade, collapsing prices and depriving governments of billions in budgeted revenues, EU sources say.
"There's a real concern of negative impacts on prices if the issue is not properly addressed," one EU source said on condition of anonymity. "Some of the studies imply that carbon prices will collapse."
It is not clear how likely European governments are to support measures that would erode carbon prices, but unless resolved, the plummeting price would put a dent in budgeted government revenues in 2013-2020.
It would also undermine investment in green technology.
Later this month, the European Commission's energy department will launch its energy efficiency plan, which will propose cutting energy consumption in buildings, vehicles and more controversially, industry.
Energy efficiency measures for building and transport are widely supported by many industries, as well as environmentalists.
But carbon market experts, including those in the Commission's climate department, say the Commission would be mistaken to put a further layer of regulation on top of the EU's main tool for curbing greenhouse gas emissions -- the Emissions Trading Scheme (ETS).
The ETS covers about 11,000 factories and power plants, forcing them to buy permits for each tonne of carbon dioxide they emit, and pushing down their combined emissions with a steadily decreasing cap.
But an overlying mandate for energy efficiency will reduce demand for permits -- by about 400 million tonnes in 2013-2020, one EU source said -- leaving them swilling around in the market, and exerting downward pressure on prices.
"The energy services directive could potentially wipe out billions of euros for governments across the EU, unless EU ETS allowances are set aside," said Sanjeev Kumar at environment consultancy E3G.
Commission energy spokeswoman Marlene Holzner declined to comment.
Carbon traders are also worried.
"The European Commission seems to be going back to the bad old days," said Henry Derwent, president of the International Emissions Trading Association (IETA).
"We have a creeping re-ascendency of command and control in a part of the world economy that once prided itself on being market oriented," he added.
The problem was initially foreseen by the Commission's climate team, under climate commissioner Connie Hedegaard, in a strategy paper in February.
But her proposal to balance out the problem by setting aside the excess permits was attacked by some of her colleagues, who sought to protect industry from high carbon prices.
It seems unlikely that EU governments would allow an internal feud at the Commission to undermine a carbon market worth billions.
But heavy industry favours a low carbon price and has gained increasing political influence over EU climate policy since the economic crisis.
"We do worry a lot that there is not much coordination between those working on the taxation, the regulation and the pricing of carbon," said IETA's Derwent.
"This has just been thrown into higher relief by the fear (the climate department) has over excess supply of permits in 2013-2020."
(Reporting by Pete Harrison; editing by Jason Neely)