European Carbon Permit Price Rally ‘Won’t Last,’ UBS Says

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The current rally in European Union carbon permits will come to an end in April, said UBS AG.

The “carbon crash” will continue because the market is oversupplied by 2 billion metric tons and companies may sell allowances once they realize how few they need, Per Lekander, an analyst at the bank in Paris, said today by e-mail. “Enjoy the carbon rally while it lasts - it won’t,” he said yesterday in a research note.

EU allowances advanced 17 percent last week on speculation that policy makers will act to curb excess supply after political parties in the European Parliament committee on industry agreed to call on the bloc’s regulator to propose withholding some permits.

“Many observers assume that the EU Parliament is about to set aside carbon allowances to prop up prices,” Lekander said. “We believe this speculation is flawed, at least in the near term.”

Carbon prices may remain strong ahead of the committee vote on the measure, which is scheduled for Feb. 28, according to Lekander. “We expect a supportive vote given the agreement and we could expect that this could create some strength,” he wrote in the note. “Often carbon also shows strength into the yearly settlement of the system which happens on 31 March. We thus expect the carbon crash to accelerate from 1 April.”

UBS, Switzerland’s largest bank, continues to see 3 euros a metric ton as “reasonable price floor” for EU allowances, according to the note.

EU carbon allowances rose 2.2 percent today to 8.96 euros a ton on the ICE Futures Europe exchange in London as of 9:24 a.m., trimming yesterday’s 5.4 percent decline.

Any changes to the EU emissions trading system could take “years, not months” and without them the program will be oversupplied each year until 2020, Lekander said. His estimate includes the use of United Nations carbon offsets.

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