The innovative market is the brainchild of the Kyoto Protocol for controlling greenhouse-gas emissions -- the carbon gases emitted mainly by burning oil, gas and coal that are driving perilous climate change.

Its backbone is the European Union's Emissions Trading System (ETS).

Under this, 11,500 firms that are big users of fossil fuels have to meet a target of CO2 emissions or else pay a penalty of 40 euros (50 dollars) a tonne for 2006 and 2007, a punishment that will rise from 2008 to 100 euros (125 dollars) a tonne.

Those that are below their quota can sell their surplus on the ETS to companies that are over, thus providing a financial carrot to everyone to clean up his act.

At the start of the week, a tonne of CO2 was changing hands at 30 euros a tonne, compared to 20.5 euros at the beginning of 2006.

On Wednesday, the price crashed to 23.40 euros, and on Thursday to 16.50 euros. On Friday, it closed at 13.19 euros ahead of the May 1 holiday.

"The downturn is due to exceptional circumstance -- the publication of verified emissions by a number of European countries," explained Jean-Francois Conil-Lacoste, director-general of PowerNext, Europe's biggest CO2 market.

Authorities in five of the 25 EU countries -- France, the Netherlands, the Czech Republic, Estonia, the Belgian region of Wallonia -- reported that their CO2 pollution in 2005 was below their quota levels, whereas Spain said it was above its quota, but less than expected.

This was the first time that governments have reported their actual level of emissions. The quotas established for the firms taking part in the ETS were based on estimates.

On the face of it, this is a rare bit of good news for the environment, given that global levels of CO2 are surging, fuelling the greenhouse effect blamed for damaging Earth's climate system.

The announcements, though, have the effect of unloading more sellers on the market. Analysts warn that a white-knuckle price ride could undermine confidence in what Kyoto's supporters claim is the smartest and most flexible way to tackle carbon pollution.

"It would be premature to trumpet this as good news," the Financial Times commented on Friday.

"For there is a strong suspicion that EU governments, of which at least 15 are on track to exceed their eventual Kyoto targets, are being too generous in awarding permits to their industries rather than the latter being unexpectedly successful in cutting pollution."

An analyst for Point Carbon, an Oslo-based market monitor, cautioned that the six reporting countries account for only a small share -- about a quarter -- of all EU emissions.

The big economies of Germany, Britain, Italy and Poland are among the other countries still to announce verified figures, the analyst said. The deadline for reporting these is May 15.

"Eventually it will sort itself out, and the market will adjust accordingly," predicted the analyst, who noted that the market was launched only in January 2005 and was still in a pilot phase, and so teething problems were only to be expected.

That view is generally shared by Conil-Lacoste. "The market has reacted healthily to fundamentals, albeit somewhat brutally," he said, adding, "However, an adjustment may be needed in the national quota allocations."

The pre-ETS carbon market in 2004 amounted to 94 million tonnes, worth 377 million euros, which rose to 799 million tonnes worth 9.4 billion euros in 2005. Before the price slump, Point Carbon estimated the carbon market could be worth as much as 34 billion euros by the end of the decade.

Related Links
-