* EU Parliament rejects plan to cut permit supply by 15 pct
* EU carbon prices fell 40 pct to under 3 euros on Tuesday
* Campaigners and traders say could drop as low as 1-2 euros
* Market liquidity to suffer as banks pull out
By Andrew Allan and Nina Chestney
LONDON, April 17 More banks and trading houses
could abandon Europe's carbon market, making government auctions
of permits more likely to fail, after the European parliament on
Tuesday rejected an emergency measure to prop up prices.
Prices for EU carbon permits under the Emissions
Trading Scheme (ETS) fell 40 percent to under 3 euros on Tuesday
after lawmakers rejected a plan to temporarily cut permit supply
by 15 percent for fear that higher carbon prices would cost
European jobs and harm economic growth.
About 5,000 companies generating half of the EU's greenhouse
gas emissions must surrender a carbon permit for each tonne of
carbon dioxide they emit. Some factories receive permits for
free, while most power firms buy them from companies with a
surplus or from state-backed auctions held almost every day.
Campaigners and traders warn the carbon price could now fall
below 2 euros or even to near zero in the coming weeks, and
government sales could fail if they don't meet minimum price
requirements, as banks that act as liquidity providers pull out.
"Forthcoming auctions may struggle to go ahead as technical
reserve prices, intended to prevent sales significantly below
the market price, could kick in," said Bryony Worthington at
environmental campaign group Sandbag.
Under EU rules, any unsold government permits must be
offered in the next four scheduled auctions after the failed
sale, putting more pressure on carbon prices.
That will be put to the test next week when more than 23
million permits will be offered in government sales in a market
drowning in an estimated 1.7 billion surplus.
CRUMBLING CORNERSTONE OF EU CLIMATE POLICY
Parliament's rejection of the so-called backloading bill
ends months of bitter debate among European ministers, lawmakers
and industry. The $148 billion market, once the cornerstone of
EU climate policy, has since 2008 been hit by an economic
slowdown that slashed demand and created a surplus of permits.
Despite the fall to just 3 euros from 30 euros five years
ago, speculators have stuck with the market to turn a profit
from price volatility triggered by the threat of political
But they might quit the market now it looks likely that
prices may be low for some time, which would require them to
stump up much more capital to get the same returns.
"We are in for a protracted period of lower prices after
this vote. The danger is that this can only hasten the rush to
the exit for some carbon players," said Mark Meyrick, head of
carbon at Dutch power company Eneco.
Some big players have already left or cut trading staff.
This year alone, Deutsche Bank shut its carbon
desk, and Swiss trading house Mabanaft will wind down operations
in June. Credit Agricole, MF Global and Cantor
have already withdrawn.
Barclays, JP Morgan and Morgan
Stanley have also pared back operations in recent years.
GLORY DAYS OVER
The Commission says it could still get agreement on the plan
by year-end, but analysts say it is unlikely to be implemented
in the current Commission's lifetime.
Proponents of higher carbon prices, such as some EU power
companies who want to invest in cleaner sources of energy, have
called on the Commission to introduce deeper structural reform
that could include expanding it to transport and adopting a more
ambitious emission reduction target.
Power suppliers say low carbon prices remove the incentive
to switch from coal to cleaner sources. Analysts say a carbon
price of about 50 euros is needed to encourage such a switch.
Debate on deeper reform started last month, but it might
take two or three years to go through Europe's complex lawmaking
process, meaning the market will be in limbo until 2015.
For now, even as banks pull out, the market will survive as
it is anchored in EU legislation until at least 2020, forcing
big European emitting companies to comply with emission caps.
"Speculators might exit, but industrials can't, so we will
see a shrink in liquidity and therefore volatility might
increase sharply," said Jacopo Visetti, emissions trader at
The effect of fewer banks could result in wilder price
swings as utilities, which are big buyers of permits, tend to
block-buy permits in the so-called hedging season, when they
sign annual contracts to supply electricity to industry.
Traders say the glory days of a market that was once tipped
to be bigger than oil have now passed, at least for this decade.
"There will always be business as there are always clients
to serve," said one trader at a London-based bank. "Desks have
been getting smaller, teams have been shrinking or vanishing. I
wouldn't be surprised if the exodus accelerated now."