Barclays Cuts Forecast for European Union Carbon Emission Prices in 2011

Barclays Plc scaled back its 2011 price forecast for European Union carbon, predicting lower emissions from factories and power stations and more permits coming to market from a reserve for new projects.

Barclays Capital, the London-based investment bank, forecasts EU permits will average 16.50 euros ($21.30) a metric ton in the first half of the year, analyst Trevor Sikorski said in a research report e-mailed today. That’s 8 percent less than he estimated in November. Prices in the second half of 2011 may be 20 euros, down from his earlier forecast of 22 euros.

Sikorski also posted his first forecasts for 2013, predicting an average price of 30 euros for EU permits and 22 euros for United Nations credits eligible in the EU system, the world’s largest cap-and-trade program. Carbon prices will rise as utilities are required to buy most of their allowances starting in 2013 after receiving most of them for free since 2005, Sikorski said.

This will alter “forward hedging strategies and raise volatility in the market sooner rather than later,” Sikorski said. “While these stronger carbon prices and the return of trend volatility should help renew some interest in the market, 2011 is likely to be just the warm-up act for some real volatility in 2012,” he said.

EU permits for December traded between 12.95 euros and 16.92 euros a ton last year on London’s ICE Futures Europe exchange. They were up 0.5 percent at 14.30 euros a ton at 3 p.m. The low volatility last year reduced the carbon market’s appeal to investors and emitters, he said.

‘Political Failure’

“The added political failure to introduce meaningful carbon prices in other geographies has resulted in scaled-down interest in the market, with people and money exiting,” Sikorski said.

Barclays cut its 2011 price forecasts after raising its estimate of how many surplus allowances will be available in the next two years to 468 million tons, 13 percent more than before. Barclays also reduced its estimate of how much greenhouse gases European factories and power stations will release.

Sikorski cited a “slight writedown in the macroeconomic picture and the outlook for industrial output.” He also said more permits from the New Entrants Reserve would enter the market, even though some nations have pledged to cancel any surplus permits.

“We have consistently assumed that most of the NER would come to market,” Sikorski said in the report. “We still expect this is the case, but now expect even those states that expressed an intention of cancelling the volumes to reconsider that position, given the precarious fiscal situations of most EU governments.”

To contact the reporter on this story: Catherine Airlie in London at cairlie@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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