2013 KfW/ZEW CO2 Barometer - Low Prices for CO2 Certificates Still a Weak Incentive to Reduce Emissions

The low price for CO2 in the EU Emissions Trading System (EU ETS) is still hardly an incentive for companies to reduce CO2 emissions. Companies regulated under the Emissions Trading System, however, do feel the impact of the weak economic situation in the eurozone. Their total CO2 emissions in Europe went down by two per cent in 2012. In Germany, by contrast, emissions of the regulated companies increased by 0.5 per cent compared with the previous year also due to the country’s on-going strong economic development. These are the findings of the 2013 KfW/ZEW CO2 Barometer. This annual survey has been jointly conducted since 2009 by KfW bank and the Centre for European Economic Research (ZEW) within a co-operation project that examines the impact of the EU ETS regime on the regulated companies.

Against the backdrop of the negative price development, the surveyed companies made significant downward revisions to their price expectations from the previous year. The average inflation-adjusted price expectations for December 2014 are EUR 8 per tonne of CO2; the expectations for December 2020 are EUR 16 per tonne of CO2. Despite current market conditions and rather cautious expectations, the surveyed companies assume market recovery and increasing prices in the long run.

The results of the survey also show that a majority of 53 per cent of the companies have built up a reserve of emission allowances during the second trading period (from 2008 to 2012), which can be used during the third trading period, too. The accumulated reserves of the surveyed companies are significantly high. On average, the companies have built up a reserve worth 123 per cent of their verified emissions in 2012. Industrial companies were able to build up more reserves of certificates during the second trading period compared to energy suppliers.

Furthermore, the analysis shows that the majority of the surveyed companies have not yet evaluated their individual potential to reduce CO2 emissions and have not assessed the costs entailed. A mere 38 per cent of the surveyed companies are informed about technical and organisational in-house solutions to avoid emissions. Moreover, the low price for CO2 hardly creates incentives to realise potential savings and avoid CO2 emissions. Although 77 per cent of the surveyed companies made investments or modifications in the production process with the goal to reduce CO2 emissions, the driving force behind these measures were price increases in energy and raw materials. A mere eleven per cent of the companies carried out measures whose main objective was to reduce CO2 emissions.

The low CO2 price impacts the companies’ behaviour on the market for emission allowances. The survey shows that the firms have increased their trading activities during the last year. More firms have entered the market for emission allowances, and the trading activities of these firms have become more frequent. Only 34 per cent of the surveyed companies did not participate in the market for emission allowances in 2012. The main reason to remain inactive on the market is that companies are sufficiently equipped with emission allowances through free allocation. Large companies and corporations tend to trade more frequently than small and medium-sized firms.

The most prominent trading strategies in 2012 were to accumulate and keep emission allowances for future use (banking), to engage in hedging transactions, and to minimise transaction costs. Small and medium-sized firms in particular have accumulated emission allowances for future use in order to keep transaction costs low.

The KfW/ZEW CO2 Barometer is a co-operation project of KfW bank and the Centre for European Economic Research (ZEW). It has been analysing the impact of the European Emissions Trading System (EU ETS) on the regulated companies in Germany since 2009. For that purpose, some 800 companies are invited to participate in the survey every year, of which, on average, approximately 140 provide information about their current situation and future strategies.

For further information please contact

Prof. Dr. Andreas Löschel, Phone +49(0)621/1235-200, E-mail loeschel@zew.de