Carbon Loses Gains as Europe Debt Crisis Outweighs Durban Deal

Carbon prices gave up gains on speculation Europe’s debt crisis will depress demand even as the world’s largest polluters back away from positions that have stymied global climate talks.

China, the world’s biggest emitter, and India agreed at the climate summit that ended yesterday in Durban, South Africa, to take part in talks starting next year that would bind them for the first time to emission reductions. The U.S., the second- biggest emitter, also signed on to plan led by Europe to reach a global agreement by 2015 to restrict greenhouse gases linked to climate change by 2020.

Europe’s ability to solve its debt problems and stabilize its economy will do more to drive carbon prices than international environmental agreements, said Assaad Razzouk, chief executive officer of Sindicatum Sustainable Resources Group, a developer of clean-energy projects that is partly owned by Citigroup Inc. and Cargill Inc.

“The carbon market pricing is driven by Europe, and what’s more important in terms of Europe is its existential and liquidity issues,” he said. “The carbon markets are more likely to be influenced by what the Europeans have been doing in Brussels than by Durban.”

European Union permits for delivery this month, which initially rose as much 6.2 percent, surrendered those gains and traded down 1.5 percent at 7.72 euros as 11:26 a.m. on the ICE Futures Europe exchange in London on Dec. 7. They traded at a record low of 6.77 euros on Dec. 6.

Market Links

The EU allows emitters to comply with obligations in its cap-and-trade program, the largest in the world, by using UN credits known as offsets, linking the UN and European markets.

Certified Emission Reductions in the UN program for December delivery fell as much as 2.8 percent in London to 5.15 euros. They traded as low as 4.53 euros ($6.04) on Nov. 25.

Carbon prices will continue to be linked to economic prospects for the European Union and any improvement in the region’s sovereign-debt crisis, Emmanuel Fages, an analyst at Orbeo in Paris, said today in an e-mailed research note. The Durban climate deal will not prompt additional emission reductions before 2020 and action from that year “is not guaranteed,” he wrote.

UN Offsets

The UN’s Clean Development Mechanism was set up by the 1997 Kyoto Protocol as a way of letting richer nations offset their emissions at home by paying for cleaner technology in emerging markets. Investors in these projects get CERs that they can sell to companies and governments with pollution caps.

While the EU is the largest market for UN offsets, Australia will allow emitters to use CERs for as much as half of their emissions in a cap-and-trade program starting in 2015.

An oversupply of credits and the European debt crisis have depressed the value of UN credits, said Milo Sjardin, head of Asian emission markets for Bloomberg New Energy Finance in Singapore.

“The short-term fundamentals absolutely haven’t changed,” Sjardin said. “But the agreement in Durban to agree sends a good signal, and markets run on signals. The long-term perspective is more positive in that at least everyone is agreeing to do something.”

China, India and other developing nations argued before 1997 that their historical emissions are negligible and that they shouldn’t be bound by the same limits as developed countries. U.S. President George Bush cited the lack of targets for developing nations when he refused to sign the treaty in 2001, and President Barack Obama’s climate envoy also ruled out emissions cuts before other large emitters agreed to the same.

EU Climate Commission Connie Hedegaard helped break that impasse at the Durban talks by presenting a “roadmap” that calls for China and India to reduce emissions by 2020.

Everyone on Board

As part of the agreement in Durban, Japan, Russia and Canada dropped their resistance to renewing their commitment to Kyoto treaty after its targets expire in 2012, even though the nations will not face new emission restrictions, Sjardin said.

“It is positive for the market,” said Phil Cohn, director at Ramp Carbon Ltd., a Melbourne-based developer of emission credits under the UN’s Clean Development Mechanism. “It removes some of the residual uncertainty about the future.”

While the Durban agreement represents significant progress, the world still needs to be more ambitious if it wants to keep temperatures from rising more than 2 degrees Celsius (3.7 Farenheit), said David McCauley, the Philippines-based chief of climate change at the Asia Development Bank.

“There is room for guarded optimism,” McCauley said. “But a lot is yet to be done.”

To contact the reporter on this story: Mike Anderson in Singapore at manderson34@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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