European Carbon May Decline to Record as Glut Expands

Photographer: Wolfgang von Brauchitsch/Bloomberg

The region’s emissions trading system, or the EU ETS, imposes pollution caps on about 12,000 installations owned by manufacturers and power plants. Close

The region’s emissions trading system, or the EU ETS, imposes pollution caps on about... Read More

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Photographer: Wolfgang von Brauchitsch/Bloomberg

The region’s emissions trading system, or the EU ETS, imposes pollution caps on about 12,000 installations owned by manufacturers and power plants.

European Union emission permits are poised to drop to a record in the first half as member states in the world’s largest carbon market fail to diminish the biggest- ever glut.

Allowances will fall below the record 5.93 euros ($7.75) a metric ton reached last month, according to eight analysts surveyed by Bloomberg News. That implies a decline of at least 8.3 percent from yesterday’s closing price. The surplus may rise 18 percent this year, according to Bloomberg New Energy Finance.

The EU’s regulatory arm last year proposed to delay the sale of some permits in a process known as backloading to boost prices and shrink supply. A failure to tackle the glut may discourage utilities from switching to natural gas and other less-polluting energy sources from coal, the 27-nation bloc said in a November report. That may curb investment needed in non- fossil fuel generation, estimated by New Energy Finance at about 400 billion euros, to meet the EU’s 2020 climate targets.

“Given the backloading may not commence earlier than in the fourth quarter, 2013 could, at best, be a year of stagnation,” said Matthew Gray, a Jefferies Group Inc. analyst in London who has tracked the market since 2008. “At worst, the proposal will fail and prices will collapse, potentially to 3 euros.”

EU carbon for delivery in December fell as much as 3.7 percent to 6.23 euros a ton on the ICE Futures Europe exchange in London today. It was at 6.26 euros as of 4:04 p.m., taking this year’s decline to 6.2 percent after a 16 percent drop in 2012. By comparison, Brent crude oil has gained 0.2 percent this year and rose 3.5 percent last year on ICE.

12,000 Installations

The region’s emissions trading system, or the EU ETS, imposes pollution caps on about 12,000 installations owned by manufacturers and power plants. The limits on discharges were set before the euro area entered two recessions in four years. The bloc’s regulator has little room to prevent a decline in prices because there is no mechanism for cutting supply.

Companies will need to buy almost half the permits in the system starting this month. In previous years they got most of them for free and had to buy extra if needed.

Delays in auctions would amount to market manipulation, Poland’s Environment Minister Marcin Korolec said in April. The measure will cut income from sales of permits in Cyprus, Poland, Estonia, Czech Republic, Bulgaria and Romania by about 1.9 billion euros in 2013 to 2020, his ministry said last month.

“There is a great deal of uncertainty whether the backloading proposal will achieve the necessary support from member states,” said Kathrin Goretzki, an analyst at UniCredit SpA (UCG) in Munich who predicts prices will fall to 5 euros by June 30. “Given the large amount of allowances to be auctioned in 2013, we expect that prices will remain depressed.”

Clarity Needed

The EU plan to sell fewer permits in the three years through 2015 will probably be delayed until next year, according to UniCredit. UBS AG, Switzerland’s biggest bank, said EU nations will probably discuss the plan for a year and then abandon it next year. The company forecasts prices from 5 euros to 7 euros in 2013. Barclays Plc, based in London, said there’s a 50 percent chance of it passing.

Connie Hedegaard, the bloc’s climate-action commissioner, said in November that the carbon market needed clarity on the backloading plan in 2012. Several member states were undecided at a meeting in December about whether they would back the measure, an EU official, who declined to be identified by name, said at the time. European governments may formally vote on the strategy in March at the earliest, the official said.

“We are very confident that governments understand the positive impacts of backloading and will therefore support it,” Isaac Valero-Ladron, a climate spokesman for the commission, said yesterday by e-mail.

‘Lost Decade’

The commission would like to have the draft measure approved as early as possible to improve the functioning of the market, ensure higher state budget revenue from carbon auctions and provide prices high enough to drive low emissions technology, Valero-Ladron said. Proposals considered in this type of legislative procedure usually need four to five months to enter into force after a vote by member states.

Germany and the U.K. are among nations still undecided on whether to vote in favor of backloading. The two countries together hold almost 17 percent of total votes in the EU ballot system, meaning their support may be needed to avoid deadlock. A fix may boost the appeal of investing in cleaner sources of energy than coal, such as nuclear and natural gas. EON SE is among utilities considering whether to close gas-fed plants while Electricite de France SA is among companies studying the construction of new reactors.

“It’s beginning to feel like we’re in a lost decade in terms of mobilizing private investment for emissions-reduction projects,” said Trevor Sikorski, an analyst at Barclays in London who expects prices to average 7 euros or less this year. “The price signal shows we’ve overinvested.”

Financial Crisis

EU allowances for delivery this year extended their loss to 77 percent since they started trading in 2008. The excess of permits rose to 1.1 billion tons at the end of last year, or almost 50 percent of the bloc’s annual pollution limit, according to New Energy Finance. The EU market began in 2005.

The 17-nation euro area’s economy will contract 0.6 percent this quarter and 0.2 percent in the three months through June, according to the median of 25 economists surveyed by Bloomberg.

The value of transactions in the global carbon market dropped 36 percent last year to 61 billion euros, as prices decreased, New Energy said Jan. 3. Australia introduced compulsory carbon pricing on July 1. California’s market began this month, boosting 2013 trading.

The EU’s estimated surplus may swell to 1.3 billion tons this year without backloading, said Konrad Hanschmidt, an analyst at New Energy Finance in London.

EU Ballot

Carbon permits will probably rise above 10 euros a ton if nations agree on the plan, said Matteo Mazzoni, a NE Nomisma Energia Srl analyst in Bologna, Italy.

The EU commission needs 255 out of 345 votes from member states and approval from the region’s parliament to tackle the glut. In the EU ballot system, which favors larger countries, the U.K. and Germany each have 29 votes. Poland, which leads the opponents of backloading, has 27.

“Backloading will never be agreed,” said Daniel Rossetto, the managing director of Climate Mundial Ltd., a London-based consulting company that works in carbon markets. “Lawmakers and market participants will realize that backloading does not offer the ‘once-only’ intervention that is desired. If implemented, it would seriously impact confidence levels in the scheme itself.”

The commission, which sees auction delays as a short-term measure to fix the market, has already started a debate on long- term options to strengthen the ETS.

‘Original Sin’

In a report presented to governments in November the regulator set out tighter emission limits and cancellation of carbon permits as well as mechanisms to support prices and restrict imported offset credits as potential scenarios to improve the market.

The best way to fix the market is to tighten emission- reduction targets, Mazzoni said. With climate slipping down the global policy agenda, increased supply of permits at auctions and backloading unlikely to happen “anytime soon,” carbon prices may fall as low as 4 euros a ton, he said.

“The original sin lies in the lack of flexibility the system has in terms of supply-demand balance,” Mazzoni said.

Offset credits in the United Nation’s Clean Development Mechanism have also plunged. Credits for delivery this year settled yesterday at 43 euro cents, down almost 90 percent in the last six months.

To contact the reporters on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net; Mathew Carr in London at m.carr@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net

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