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UTILITY WEEK | 27Th JUnE - 3rd JULY 2014 | 21 Finance & Investment T he European carbon market has been walking in a vale of tears. Emission levels have been low due to the financial crisis, renewable capacities have increased and the use of credits generated by project- based emission reductions outside the European Union Emissions Trading System (EU ETS) has been huge. This has led to the accumulation of more than two billion car- bon allowances – enough to cover a year of emissions for the 12,000 installations participating in Europe's carbon market. This oversupply led to carbon prices tumbling from €30/tonne in 2008 to the current level of about €5. Being able to emit a tonne of carbon for less than the price of a cappuccino in Brussels' main square has made policymakers in the European Commission wonder how the long-term emission reduction targets will ever be achieved. Even though the 2020 target of a 20 per cent reduction on 1990 levels will likely be met, costly investments in abatement technologies will have to be made to achieve the long-term targets of an 80 to 95 per cent reduction by 2050. Therefore, as part of the 2030 climate and energy framework propos- als published in January, the Com- mission has pro- posed a structural reform of the EU ETS in the form of a market stability reserve (MSR) – a technical mechanism designed to adjust supply depending on demand. The mechanism will have two main purposes: reduce the oversupply of allowances and make the EU ETS more resilient to demand-side shocks. The idea is to design an automatic adjustment mechanism of the auctioning vol- ume, based on an annual assessment of the allowance surplus. As long as the oversupply is above a predefined threshold, allowances will be placed in the reserve instead of being auctioned. Once the oversupply drops below a threshold, allowances are released. According to the proposal, the MSR will begin operat- ing in 2021, but it must go a long way through Brussels' institutions before becoming a reality. If politicians sup- port the idea, it will likely give carbon prices a push over the next decade and incentivise investments in abate- ment technologies. Until that decision is made, carbon prices will have a hard time leaving the vale of tears. Marcus Ferdinand, manager of EU carbon analysis, Thomson Reuters Point Carbon "Being able to emit a tonne of carbon for less than the price of a cappuccino has made policymakers wonder how the long-term targets will be met." Analyst view Marcus Ferdinand The mechanism will make the EU ETS more resilient to demand- side shocks Analysis UK and China call for climate action Governments agree to collaborate in tackling climate change and energy security, says Megan Darby. C hinese premier Li Keqiang made his first trip to the UK last week and energy was joint top of the agenda, along with finance. In a wide-ranging agreement on energy and climate change, the UK confirmed Chinese companies could own and operate a nuclear power station on UK soil. It also highlighted collaboration on renewable energy, shale gas, carbon capture and storage (CCS), green finance and carbon markets. The two governments issued "an urgent call to action" on climate change ahead of a global summit in Paris next year. In a joint statement, they said: "The UK and China both recognise the clear imperative to work together towards a global framework for ambitious climate change action, since this will support efforts to bring about low carbon transitions in our own countries." China General Nuclear Power Group has already reportedly been in talks with EDF Energy about investing in the £16 billion Hinkley Point C project. The final invest- ment decision is subject to the UK government's proposed support package getting state aid approval from Brussels. The UK government welcomed the participation of Chinese companies in Hinkley Point C and explicitly stated that they could lead the development of other nuclear sites in the UK. A memorandum of understand- ing with the China Atomic Energy Authority and China National Nuclear Corporation also committed to co-oper- ation in the nuclear fuel, waste disposal and decommis- sioning supply chains. The civil nuclear agreement could be worth "hundreds of millions of pounds" to British companies, according to the Department of Energy and Climate Change. On low carbon innovation, the UK and China pledged £20 million of funding for a research programme cover- ing offshore renewables, low carbon manufacturing pro- cesses and technologies, and low carbon cities. The UK has committed £35 million from the Interna- tional Climate Fund to CCS development in China and Indonesia. It is providing advice on the launch of China's emissions trading pilot schemes. There is governmen- tal and commercial collaboration on shale gas, and it is hoped that shale could "play a valuable bridging role" to a low carbon energy model. Energy secretary Ed Davey said: "China and the UK stand united in our plans for more collaborative work- ing that will help to achieve long-lasting energy security in our own countries. Both governments recognise that tackling climate change is fundamental to our future and have committed to reduce emissions while enhancing energy security by investing in nuclear power."