US Northeast carbon futures prices drop 19 pct

NEW YORK, Sept 5 Fri Sep 5, 2008 7:07pm BST

NEW YORK, Sept 5 (Reuters) - Carbon futures prices in the U.S. Northeast market have dropped nearly 20 percent since the contracts debuted last month on expectations that power companies will have little initial need to buy permits to emit the greenhouse gas pollution.

"It just doesn't feel like there's excitement necessary to spark a market at this point," one New York greenhouse emissions broker said. "There's no major rush to jump in."

Prompt prices for Regional Greenhouse Gas Initiative carbon futures on the Chicago Climate Futures Exchange settled at about $4.48 a ton on Thursday, about 19 percent below prices when they debuted on Aug. 19.

The RGGI, a group of 10 states in the U.S. Northeast, will officially begin regulating the main greenhouse gas, carbon dioxide, at power plants on Jan. 1.

Some of the states will offer permits to emit carbon to power plants and investors in RGGI's first auction on Sept. 25, when permits representing 12 million tons of emissions will go on sale.

Ahead of the auction, RGGI carbon futures contracts started trading late last month on the CCFE, owned by Climate Exchange PLC CLIE.L, and on the New York Mercantile Exchange NMW.N.

Carbon market players said power companies have three years to comply with RGGI regulations, so many of them will wait out the first auction at least to discover where the price lies.

"The utilities ... are interested in kind of sitting back and seeing how the market evolves before they have to commit. There's not much advantage for early actors in this market," said Donald Sunderland, vice president of Misys Open Source Solutions.

Also cutting demand, emissions have recently fallen below the cap RGGI agreed to. In fact, RGGI CO2 emissions in 2007 were about 9 percent below the cap the group set of 188 million tons per year from 2009 to 2014, according to Environment Northeast, a green group that helped form the market.

Emissions have fallen as it became economical for power plants to burn natural gas rather than dirtier oil, cooler summer weather and a softer economy. Still, the emissions could rise again quickly, which could lead to increased demand for permits.

New York, New Jersey, Delaware and New Hampshire, states that represent 55 percent of the cap, failed to finalize regulations in time and will not be offering their permits in the September auction. The states may participate in the next auction in December, or in other ones next year. (Editing by Walter Bagley)