Carbon at record lows, confidence at rock-bottom

LONDON Thu Nov 24, 2011 5:54pm GMT

A wind turbine is seen behind utility poles in Tokyo July 27, 2011. REUTERS/Kim Kyung-Hoon

A wind turbine is seen behind utility poles in Tokyo July 27, 2011.

Credit: Reuters/Kim Kyung-Hoon

LONDON (Reuters) - European Union carbon permits and U.N.-backed credits collapsed to record lows on Thursday, extending this week's sharp price slide as fears of a slowing economy sapped demand in the markets that are heavily supplied with emissions units.

It was also a signal that market participants are losing confidence in the flagging EU carbon market, the world's biggest cap-trade scheme, traders and analysts said.

This latest crash could not have come at a worse time. In just a few days a U.N. climate summit in South Africa will resume work on a new globally binding pact to cut emissions.

Investors are already nervous about the future of carbon markets, given the uncertainty around when a new climate pact will emerge and what trading mechanisms will operate under it.

"Confidence is at an absolute minimum. It's the macro-economic picture and the whole sentiment is not too good," said a carbon trader at a financial institution.

Front-year carbon permits called EU Allowances (EUAs) closed 6.6 percent lower at 7.91 euros ($10.54) a tonne, after touching an all-time low of 7.80 euros earlier.

"There's room to go down to 7 euros," said Matteo Mazzoni, carbon analyst at Nomisma Energia in Italy, adding that 7.70 euros could be the next support level.

Some 11,000 power generators and industrial plants from 30 European countries take part in the region's emissions trading scheme. It covers around half of the bloc's carbon emissions.

Benchmark U.N.-issued carbon credits, which come from accredited emission reduction projects in developing countries, closed down almost 8 percent at 5.43 euros, after hitting a new record low of 5.30 euros.

FREEFALL

Carbon prices have shed more than half their value since June, as the euro zone's worsening debt crisis choked demand for emissions permits.

The EU carbon market is also oversupplied with hundreds of millions of permits, and some analysts don't expect demand to outpace supply until 2020.

"The oversupply seems to be overwhelming," the trader said.

Electricity generators, which are the main drivers of demand, will unlikely be big buyers of carbon allowances until after 2012, particularly if their emissions fall due to a severe economic slump.

The EU Commission said it would not comment on current carbon prices.

Speaking in Brussels on Thursday, Denmark's climate, energy and building minister Martin Lidegaard said: "Carbon prices are low because there is a crisis. This is a serious problem that threatens stability for investors."

The minister added that the EU Commission would be looking at ways to support prices, declining to give further details.

UK manufacturers' organization EEF urged the EU to "overcome its obsession with cap-and-trade as the beacon for tackling climate change" and should be open to other measures or risk being sidelined at U.N. talks.

Recent price falls have prompted five sets of carbon analysts to reduce their price forecasts in the past two weeks.

Point Carbon cut its EU carbon price forecast on Thursday for the third phase of Europe's Emission Trading Scheme (2013-2020) by 45 percent to 12 euros.

The collapse has also reignited talk of price floors.

Last week, UBS said the carbon price could bottom close to 3 euros, but other analysts said there is no real floor, especially if the EU enters another recession.

(Additional reporting by Barbara Lewis in Brussels; editing by Jason Neely)

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