London, UK (GLOBE-Net) – European carbon prices have dropped precipitously in the last week, as several countries reported lower-than forecast emissions. France, Estonia, Belgium, the Czech Republic and Netherlands have all announced that they have surplus carbon credit allowances after undershooting their emissions limits under the EU trading scheme.

In the past year, carbon prices have soared as utilities and energy companies snapped up credits in order to meet their targets. From a weekly high of 31 Euros per tonne, prices on Friday fell to as low as 14 Euros before rising again to 17.

The EU carbon trading scheme, the flagship for carbon trading in the world, sets a cap of total emissions of carbon dioxide by ‘smokestack’ industries, and companies must have a carbon credit for each tonne they release. Lowering emissions allows firms to sell excess credits, while over-polluters can buy credits at market prices.

This month is a true test for the trading system, which has been hailed as a success up to this point. EU member states must now reveal their emissions in 2005, the first year of the plan, along with projected credit allocations for the second phase from 2008-2012.

Wholesale power prices, which set a level for carbon, were lower this week across Europe. The drop had some traders concerned.

“From a market perspective it’s terrible news,” said James Emanuel, Head of Carbon Trading at brokers CO2e.com, reports Reuters. “If there’s a (net carbon credit) surplus there’s no incentive to reduce emissions and the (carbon) price collapses. It won’t go to 0, it would effectively go down to the administrative cost of the scheme… it could be 1 euro, who knows?”

But other analysts pointed out that countries that are expected to exceed their limits and need to purchase extra credits – Britain, Germany, Italy, Spain and Portugal – have not yet reported their emissions. Should those countries require large amounts of offsets, prices could rise again.

Many EU member firms may also have missed the deadline for reporting their past-year emissions and could face fines, reports Environmental Finance. Phase 1 of the trading system is facing challenges that could determine the success of the initial scheme until 2007, and Phase II from 2008-2012 may produce some changes.

Canada and other countries are watching the EU market closely, as they debate whether to establish domestic trading systems of their own and possibly to link up with the EU scheme.

Environment Minister Rona Ambrose has indicated that some form of emissions cap and trade system could make up part of the new ‘Made in Canada’ climate change plan that is expected soon.