UPDATE 2-EU carbon down 8 pct on permit withdrawal plan

Tue Nov 13, 2012 5:18pm GMT

* Short-term market impact seen limited

* Proposals for permanent solutions to low prices due Wednesday

By Nina Chestney

LONDON, Nov 13 (Reuters) - Prices for EU carbon emissions permits closed 8 percent lower on Tuesday, after the European Commission proposed the withdrawal of only 900 million permits in its Emissions Trading Scheme (ETS) from next year to prop up low prices.

Speculative market participants who had been expecting a greater number in the proposal helped drive up prices to an eight-month high of 9.10 euros a tonne on Monday.

However, they switched to the sell side on Tuesday when the number was released, traders said.

The benchmark contract for EU Allowances (EUAs) on ICE closed at 8.37 euros ($10.64) a tonne, 7.8 percent lower than the previous day's closing price.

The market was likely to remain volatile on Wednesday, traders said, when the European Commission is due to publish a report outlining more permanent solutions to low carbon prices.

Earlier this year, the Commission announced its intention to withhold permits from the market temporarily - 400 million, 900 million or 1.2 billion units - in a process known as backloading.

On Monday, the Commission said the plan would push back 400 million allowances in 2013, 300 million in 2014 and 200 million in 2015. The permits would be reintroduced to the market in 2019 and 2020.

Prices for carbon permits have been trading between 6 and 9 euros for most of the year due to an economic downturn which has reduced demand for permits from industry and power companies, and a more general over-supply of permits.

LIMITED IMPACT

The ETS caps carbon emissions on more than 12,000 industrial and power plants across the 27-nation bloc and governments are allowed to sell a certain number of carbon permits each year called EU Allowances.

Some experts and green groups say low prices undermine the effectiveness of the scheme as it reduces participants' incentive to reduce emissions.

The Commission plan to temporarily withdraw carbon permits should only have a limited, short-term impact on prices, analysts said.

"In the short term we expect to see a sideways trend in EUA prices. In the medium to long term, however, prices should stabilise and post further gains," said UniCredit analyst Heiko Siemann.

However, the supply of new permits to the market continues unabated, with a number of auctions scheduled between now and the end of this year putting pressure on prices.

Deutsche Bank analysts said a more permanent, structural solution to the problem of permit over-supply is still needed, otherwise prices will only fall again later when withheld EUAs are reinserted into the market.

The Commission's withdrawal proposal now has to be debated by EU member states, which are expected to vote on Dec. 13.

If the number is approved, it could push EUA prices back to 15 euros a tonne or more in the 12-18 month period after formal adoption of the plan, Deutsche Bank said.