European CO2 prices plunge on permit allocations

LONDON (Reuters) - European carbon permits fell to their lowest level in nearly four months on Wednesday as France and Portugal allocated EU permits to industry, quelling worries over a potential market shortage, traders said.

France's emissions registry confirmed on Wednesday they have allocated some 132.8 million EU Allowances to its industry, while Portugal's emissions registry told Reuters it issued 30.2 million out of a total quota of 34.8 million last Friday.

Eight countries have now allocated nearly 500 million EUAs, or around one quarter of the total cap under the EU Emissions Trading Scheme.

Market participants have been concerned that a lack of available EUAs could force sellers to default on the December delivery of futures contracts, not to mention bring the spot market to a grinding halt.

Benchmark EU Allowances (EUAs) traded down 1.27 euros or 5.4 percent to 22.36 euros a tonne on Wednesday afternoon, the lowest level since early April. The futures bounced back slightly at 22.60 at 12 p.m. EDT.

The Dec-2008 delivery contracts are now down almost 25 percent since hitting a 2-year high of 29.69 euros in early July on the back of record oil and power prices.

"Banks sold pretty aggressively today, and with a lack of buyers out there it didn't take too much to push down the market," one emissions traders said.

"I think banks are expecting French and Portuguese installations to sell their EUAs on the spot market to raise cash. Cash is very expensive these days," he added, referring to difficulties in borrowing money during the credit crunch.

He also suggested installations participating in the EU scheme might sell part of their 2008 EUA quota now and opt to borrow from their 2009 allocation, which is due to be received early next year, before EUAs for 2008 compliance are due to be turned in.

Another trader suggested a weaker energy complex coupled with a surplus of sellers looking to offload excess EUAs may also be dampening carbon prices.

"There's an awful lot of length in the market right now looking to get out," he said.

European power prices eased on Wednesday, driven down by prospects for ample nuclear availability and a drop in French power consumption ahead of the start of the holiday season.

Day ahead baseload in Germany dropped by 2 euros on the day to 75 euros a megawatt hour in the over-the-counter market while the French contract fell by two euros to 74.25 euros.

Meanwhile U.S. crude oil futures rose around $1 after a government oil inventory report showed gasoline supplies fell sharply last week, against forecasts for supply to be up slightly. Benchmark U.S. futures was up $1.20 at $123.39 a barrel.

CERs, the project-based offset credits traded under the Kyoto Protocol, also fell sharply, dropping below 18.00 euros a tonne at one point Wednesday afternoon.

For additional analysis on the carbon markets, go to www.reutersinteractive.com

(Reporting by Michael Szabo; Editing by Nigel Hunt)