Latest carbon market news: prices ‘like Titanic’

Carbon `Like Titanic’ Sinking on EU Permit Glut: Energy Markets
2012-03-30 11:01:31.923 GMT

By Ewa Krukowska
March 30 (Bloomberg) — The plunge in European Union carbon
permits is putting prices on course for their longest-ever
decline and shows no sign of ending as member states wrangle
over curbing a glut in the market.
EU allowances for December fell 4.9 percent this year,
extending a streak of quarterly losses stretching back to March
2011. Prices may drop a further 50 percent and lawmakers will
probably fail to cut supply in the world’s largest emissions
market through a so-called set-aside process, according to UBS
AG. For First Climate AG, an asset manager that advises the
European Investment Bank’s carbon funds, emissions are unlikely
to recover in the next quarter.
‘Unless EU governments come up with a surprise decision to
strongly support the set-aside or ambitious mid-term emission-
reduction targets, I don’t see prices moving up much over the
coming months,’ Tuomas Rautanen, head of regulatory affairs and
consulting at First Climate in Zurich, said by e-mail.
A surplus of permits and the inability of European nations
to agree how to tackle the glut in the $120 billion market sent
prices to an all-time low this year. Verified emissions data due
on April 2 may show 2011 discharges from more than 12,000
factories and power plants in the region’s trading system fell
short of the number of issued and sold permits for a third year,
according to Bloomberg New Energy Finance.

Low-Recovery Odds

Permits for December, the benchmark contract, slid as low
as 6.38 euros ($8.47) a metric ton on Jan. 4 on London’s ICE
Futures Europe exchange. The current-year contract was up 1.6
percent at 6.96 euros at 11:29 a.m. today. The average in the
past year was 11.87 euros.
Prices will probably fall to about 3 euros before lawmakers
are able to tighten the bloc’s emissions targets, a process that
may take ‘years,’ Per Lekander, UBS’s Paris-based global head
of utilities research, said in a phone interview yesterday.
‘It’s not that I’m skeptical on the set-aside, it’s just
not going to happen,’ he said. ‘It’s going to get blocked.’
Permits have slid 61 percent in the past 12 months as
industrial production slowed, reducing demand. Companies covered
by the trading program discharged 1.93 billion tons of carbon in
2010, compared with their allocated 1.99 billion tons.
A potential set-aside of permits may offer only a temporary
relief to the system, which needs a ‘deep overhaul’ after
expectations that a global climate deal will lead to a system of
interlinked national markets failed to materialize, according to
Jan Pravda, director of Prague-based Pravda Capital Trading.

U-Turn or Crash

‘It’s a big challenge to re-design the ETS and make it a
system that would reward both energy efficiency and pure
emission reductions, but you can’t avoid it,’ he said today by
phone. ‘It’s like being on the Titanic and seeing the iceberg
in front of you; either you make a U-turn or crash.’
The EU’s cap-and-trade program, which imposes emission
quotas on businesses and requires those exceeding their limits
to buy permits from companies that discharge less, allows unused
allowances to be rolled over into later years. That may produce
a 1.1 billion-ton oversupply of permits in the 2008-2012 trading
phase, equal to about 53 percent of an average annual EU
pollution limit in that period, according to BNEF.
The current price of greenhouse-gas pollution is less than
a fourth of what policy makers expected it to be when the system
was reviewed in 2008 to meet the bloc’s climate-protection
targets and encourage investment in low-carbon technologies,
Peter Liese, a German member of the European Parliament
representing the European People’s Party, told reporters Feb.

‘Necessary Amount’

According to one of 104 amendments to a planned energy-
efficiency law endorsed by the parliament’s industry committee
on Feb. 28, the European Commission may propose to withhold a
‘necessary amount of allowances.’
To become binding, the changes would need backing from
member states, which may decide to leave out the alterations in
their version of the law, according to a draft proposed by
Denmark, which holds the EU rotating presidency.
Even if the set-aside option is removed from the planned
law, the commission has the right to come up at any time with a
proposal to withhold permits.
Any proposal to delay auctions of allowances from 2013
would need the support from national governments in a separate
regulatory process. The commission will probably get enough
backing from nations to set aside 700 million of permits in the
eight years through 2020, according to Barclays Plc.


Prices may rise to 9 euros a ton in the second half should
there be a ‘positive outcome on the set-aside,’ Trevor
Sikorski, the London-based director of energy-markets research,
said in a March 26 report. The bank previously forecast prices
would climb to 8 euros a ton.
While a move to temporarily withhold permits may help
prices, it’s unlikely to affect investment in clean energy
unless the EU sends a signal that allowances will be
subsequently canceled, Sikorski said.
Any permanent removal of allowances would mean a tighter
emissions cap for the bloc, a step that would require a revision
of the emissions-trading legislation and also involve the
European Parliament and may take more than a year.
The EU is on course to meet its goal to reduce greenhouse
gases by 20 percent in 2020 compared with 1990 levels and member
states remain divided over the need for stricter climate
policies. Poland blocked a statement by energy ministers March 9
on post-2020 emission-reduction goals, which it said may result
in discussions about revising the existing target.

Undermine Confidence

Poland also opposed the idea of a set-aside, which
Environment Minister Marcin Korolec said would destroy the
essential market features and undermine investor confidence in
the stability of European legislation, according to a letter he
sent to his counterparts.
Any developments on the possible structure of the set-aside
and support for or opposition to the measure triggers carbon-
price swings, UniCredit SpA analyst Heiko Siemann in Munich,
said in a report on March 23.
‘Until we have credible coordinates on these matters,
prices will remain unpredictable,’ they said. ‘After breaking
the mark of 7 euros per ton, we can’t exclude that the all-time
low of 6.38 euros from Jan. 4, 2012, will be reached.’

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–With assistance from Mathew Carr in London. Editors:
Alessandro Vitelli, Lars Paulsson

To contact the reporters on this story:
Ewa Krukowska in Brussels at +32-2-237-4331 or

To contact the editors responsible for this story:
Lars Paulsson at +44-20-7673-2759 or