Excess of carbon allowances casts further cloud over Europe

Carl Mortished

A surplus of permits to emit 100 million tonnes of greenhouse gases is hanging over Europe’s carbon market, which slid yesterday as energy traders reacted to the failure of the Copenhagen climate change conference.
The price of European Union allowances (EUAs) — rights to emit a tonne of carbon dioxide — fell by as much as 9 per cent on Europe’s emissions trading system (ETS). The slide came after a week in which carbon prices had been pummelled as short-term investors began to unload their positions with news emerging of the deadlock in the climate change talks.
“People are shorting the market to trigger further sales,” Emmanuel Fages, a carbon analyst at Société Générale, the investment bank, said. The price of EUAs for December 2010 delivery ended at €12.45 per tonne, as much as €2 lower than the price two weeks ago, reflecting growing doubts over the commitment of governments to tightening carbon regulation.
The UN talks in Copenhagen ended over the weekend without a binding agreement to reduce emissions. Had an accord been reached with the United States and key developing nations, it had been expected that the European Commission would have raised its target of emission reductions from 20 per cent to 30 per cent.

Under Europe’s ETS, higher targets would be expected to reduce the number of permits that could be issued under future phases of the carbon-trading scheme, so raising the price of EUAs. In turn, more expensive EUAs would create an incentive for industry to reduce emissions.
The Copenhagen failure is reviving fears of a growing mountain of surplus carbon permits. European industrial companies may be holding as much as 100 million tonnes of allowances, according to Société Générale.
The recession has left energyintensive companies with more EUAs than they need to meet their 2009 emission targets. Because unused allowances can be rolled over for use in future phases of the ETS, companies may have been hoarding, anticipating that Copenhagen might lead to tighter carbon regulation. The lack of a deal could change their strategies.
“They might dispose of their holdings. If this happens, the pressure will come on the price during the first quarter of 2010,” Mr Fages said.
The Climate Change Bill being debated in the US Congress could lead eventually to two markets trading in carbon permits. An American cap-and-trade system for reducing carbon would be larger, with volumes of between five billion and six billion tonnes, compared with two billion tonnes in Europe.