The European sovereign debt crisis that's spread from Greece toItaly and is roiling the region's banks now has another potentialvictim: energy policy.

European Union emission permits, needed by polluters fromutilities to cement makers for each ton of the carbon dioxide theyput in the atmosphere, slumped to their lowest price in 2 1/2 yearson Oct 4. An auction of permits by Greece, trying to avoid the euroarea's first default, worsened a glut of the allowances, UBS AGanalyst Per Lekander said last week.

Lower carbon prices discourage European utilities including EONAG and GDF Suez SA from investing in wind farms and solar plantsthat don't need permits. The industry needs to spend as much as 900billion euros ($1.3 trillion) by 2020 to meet a target of getting20 percent of power from renewable sources, Citigroup Inc.estimates. The economic slowdown is adding to carbon-permit supplyas manufacturers and generators sell allowances not needed by idlefactories and power plants.

“The thing that will most kill renewable development is lowcarbon prices,” said James Cox, an analyst at energy consultantPoyry in Oxford. “If the Eurozone crisis continues, that will leadto an extremely low carbon price and it makes it difficult toinvest in low-carbon generation.”

EU carbon permits for delivery in December fell to 9.82 euros ametric ton last week, the lowest price since February 2009 and a 46percent decline from May's year-to-date high. That compares withthe 16-pound (18.44-euro) price floor the U.K. has suggested isnecessary to ensure investment in low-carbon generation. EU permitsrose 2.2 percent to 10.69 euros a ton as of 11:26 a.m. today onLondon's ICE Futures Europe exchange.

The “price level does not encourage investments in low- carbonenergy generation capacities,” Georg Oppermann, a spokesman forEON, said by phone from Duesseldorf. “Companies will only invest ifthey can expect higher prices in the future.”

The EU cap-and-trade system, which puts limits on more than11,000 utilities and manufacturing companies across the union's 27members, began in 2005 and is now in a second phase that ends in2012. In the third stage starting in 2013, the majority of powerplants will be required to purchase all their permits.

The program is the cornerstone policy to meet a binding targetto cut carbon emissions 20 percent from 1990 levels by 2020. The EUmay seek to cut carbon release by as much as 95 percent by2050.

“We have seen similar price developments during the first waveof the economic crisis in 2008,” Daniel Kluge, a spokesman forGermany's BEE renewable energy lobby, said in a telephoneinterview. “The emissions-trading system needs to be adjusted to beable to react better to the expansion of renewables and short-termeconomic developments.”

The U.K. is one country looking at ways to remove carbon- priceuncertainty from investment decisions. Britain, which plans toinstall more than 8,000 offshore wind turbines by 2020, hasproposed measures including the 16-pound carbon floor pricestarting in 2013, rising to 30 pounds by 2020.

“The current volatility of the price of carbon is indicative ofwider issues within the electricity market that need to beaddressed,” Electricite de France SA's U.K. division said in ane-mailed statement. The price floor will “begin to restore thecarbon price signal to what was originally intended by creation ofthe EU emissions-trading scheme.”

Europe must take “urgent action” to prevent further declines incarbon prices, according to Graeme Sweeney, Royal Dutch Shell Plc'svice president of Future Fuels and CO2. He recommended withholdingsome carbon permits in the next phase of the program to ensureprices are high enough to encourage low- carbon investment.

A program to fund carbon-capture and storage projects that buryemissions underground may run afoul of the plunge in carbon prices,PricewaterhouseCoopers LLP said. The EU plans to help financecarbon-capture sites and other renewables investments with moneyraised from the sale of 300 million permits from a reserve in thenext phase of the carbon trading system.

The drop in carbon prices means the storage projects, moreexpensive than most renewables investments, may not get the fundingthey need, said Jonathan Grant, London-based assistant director ofsustainability and climate change at PwC, the managementconsultant.

Once the European Investment Bank starts selling permits fromthe reserve this year it will add more supply to the market. Aswell as governments, companies are getting rid of permits to shoreup balance sheets in the face of tighter credit markets, acccordingto Barclays Capital analyst Trevor Sikorski.

European countries have 93 million permits from the so- callednew entrant reserve that they can sell by the end of 2012,according to researcher Bloomberg New Energy Finance. Sales such asthose undertaken by Greece last week may add to the market'svolatility, BNEF analyst Konrad Hanschmidt said last month.

Jean-Francois Cirelli, the president of Europe's largestutility, GDF Suez, said in September that the EU is “not a stablepolitical environment” and utilities will struggle to raise themoney needed for new plants. “It is unimaginable it will befinanced easily.”

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