CO2 Loses ‘Mojo,’ Tracks EU Economic Health, IdeaCarbon Says

The European carbon market is increasingly becoming an indicator of European Union economic output, rather than being fixed by supply and demand for the permits, IdeaCarbon said.

EU permits for December were correlated yesterday with the Euro STOXX 50 index at 76 percent, the highest since Aug. 10, 2009, according to Bloomberg data. It’s been correlated with the 10-year German bond at 66 percent since July, said Matthew Gray, an analyst in London at IdeaCarbon, which rates emission credit projects.

“Carbon is increasingly becoming an indicator for European economic health,” Gray said yesterday in a report. “It’s lost its mojo,” he said today by telephone, explaining that carbon is not being driven by its own supply and demand.

The EU will probably have economic growth of 1 percent next year, compared with 1.6 percent this year, Barclays Plc forecast yesterday in a report. There’s a probability of as much as 20 percent that European authorities fail to contain the sovereign debt crisis and a second major financial crisis and recession ensue, the bank said.

Europe’s emissions-trading program, the world’s largest, imposes pollution limits on more than 11,000 utilities and factories. The economic slow-down since 2008 left forecast emissions below that limit in the years through 2012, causing an oversupply of permits in the market. A mechanism to re-establish price tension during macroeconomic events is needed to ensure the carbon market drives cleaner investments, according to IdeaCarbon.

Price Drop

Carbon permits dropped as much as 0.9 percent to 11.25 euros ($15.24) a metric ton, the lowest since Aug. 9. Contracts have lost 21 percent this year. Investors are dumping riskier assets for those deemed safer, Gray said.

Emission allowances are deemed risky in part because they are a security derived wholly from a market created by EU politicians, said James Cameron, vice chairman of Climate Change Capital in London, who helped write the 1997 Kyoto Protocol on behalf of small-island states. “It’s got to do with the dependability of governments to stick to policies,” Cameron said Sept. 1 by phone.

Debate about a loss in confidence in the EU carbon market is “surprising,” said Jos Delbeke, director general of the climate action unit at the European Commission in Brussels. That’s because the bloc put in place laws in 2008 that will see the number of allowances in the system drop to 70 percent below 2005 emissions by 2050, he said today in a Thomson Reuters Point Carbon newsletter.

The EU market does not require an extension of the 1997 Kyoto Protocol to continue, Delbeke said. Whether global climate talks in November and December agree to extend targets in the protocol “will not have any material effect on the European carbon market.”

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