EU carbon price to drop further by year-end

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LONDON (Reuters) - European carbon emissions will continue to be volatile to the end of the year, with prices expected to tighten to 13 euros or lower if industrial output figures and the economic newsflow do not improve.

Carbon prices have more than halved a two-year high this summer by falling to below 15 euros ($19.79) in November, a level analysts previously regarded as a potential price floor.

Lower industrial output, a flood of emissions permits onto the market, strong selling to generate cash in the financial crisis and falling oil prices have all contributed to carbon’s decline.

“There is no respite in view for EUAs (emissions permits),” said Societe Generale’s Emmanuel Fages.

As the economic situation worsens and further cuts in industrial output are announced, emissions and thereby demand for EUAs are reduced, driving prices south.

Crude oil, which carbon tracks, has fallen by around $100 a barrel from a record high of $147.27 reached in July, pressured by weakening global demand.

U.N. climate talks in Poland and European Union decisions about its flagship emissions trading scheme this week are also expected to be bearish, offering no support for prices.

“Some difficult issues still prevent a final deal on the new rules for EU ETS … A share of free allocations to power producers will thus be necessary to get reluctant countries in Eastern Europe to accept a deal,” Point Carbon analysts said in a note.

In the face of such factors, carbon prices could fall to 12 or 13 euros or even lower, analysts and traders said.

“This (level) is well below fundamental values but as of now there is nothing able to support the market and especially no significant buyers,” said Fages.

Daiwa Institute of Research analyst Ashley Thomas forecasts prices of 13 euros a ton in 2009 due to volatile oil and the lack of bullish news from U.N. climate talks in Poznan, Poland.

VOLATILITY

The European Union’s Emissions Trading Scheme (EU ETS), worth $50 billion last year, is the cornerstone of European climate policy. It caps heavy industry emissions and distributes a fixed quota of permits which can be traded among participants.

The scheme allows companies a cheap alternative way to meet their emissions targets through buying carbon offsets from U.N.-approved clean energy projects in developing countries.

Fortis analyst Katrin Fuhrmann sees EUAs between 10 and 14 euros, a price below what many project developers have paid for offset credits.

“The biggest uncertainty in the market right now is the price they are willing to pay for those credits and the quality of the projects going through (U.N. registration process),” she told Reuters.

The Carbon Trust, a UK government-funded agency which advises business on how to cut emissions, estimates that EUA prices could average below 10 euros a ton during 2009 as support for the market slackens.

“Prices may also be highly volatile as perceptions of the prospects for an effective post-2012 (climate) agreement fluctuate,” the agency said in a report.

The Carbon Trust does not expect prices to collapse to zero as they did in the first phase of the EU ETS (2005-07) because there will not be the same over-supply as surplus EUAs can be carried through to 2020.

Under current EU proposals, unused EUAs issued between 2008-2012 can be banked through to the scheme’s third phase, which runs from 2013-2020. This gives the market more incentive to hold EUAs rather than sell them at current prices.

By Nina Chestney - Analysis
(Additional reporting by Michael Szabo; Editing by James Jukwey)