EU Carbon Permits Drop After Output Unexpectedly Falls

Carbon permits plunged to a record after European Union data showed emissions from factories and power stations in the region fell more than expected last year amid milder-than-normal weather.

Emissions decreased 2.4 percent to 1.7 billion metric tons in 2011 from 1.75 billion tons for the same installations in 2010, according to preliminary data published today on the EU website and compiled by Bloomberg New Energy Finance. The median estimate of seven analysts surveyed last month by Bloomberg was for a 0.7 percent advance. Today’s data covers about 88 percent of facilities in the market.

EU carbon for December dropped 11 percent to close at 6.34 euros ($8.45) a ton, the biggest loss since April 28, 2006 on the ICE Futures Europe exchange in London. The previous low was 6.38 euros on Jan. 4. Power-industry emissions dropped to 2009 levels, said Matteo Mazzoni, an analyst for NE Nomisma Energia Srl in Bologna, Italy.

“That is the elephant in the room,” he said today by e-mail. “And then, of course, you have stagnating industrial production.”

The greenhouse gas program, the second-biggest energy market in Europe by open interest after Brent crude oil, is oversupplied with EU allowances and United Nations credits by 9.9 percent, New Energy Finance in London estimated. That’s prompted lawmakers to consider withholding supply in planned auctions during the next few years to revive prices, according to votes in the European Parliament. Open interest is a measure of trading positions that have not closed.

Oversupplied Market

“Whatever the emissions data, the system remains heavily oversupplied with permits,” Mark Owen-Lloyd, head of carbon trading at CF Partners (U.K.) LLP in London, said today by e-mail. “An EU decision to withhold permits will drive the market up.”

The market was probably 4.9 percent oversupplied last year, excluding UN offsets, according to the preliminary data. Emissions from installations in Germany dropped 1.2 percent and in the U.K. declined 7.2 percent. Average temperatures across the U.K. in December, for instance, were 0.6 degrees Celsius (1.1 Fahrenheit) above normal and were “much milder” in winter months than the previous three winters, according to a statement on the website of Britain’s Met Office.

Greece was among nations failing to report emissions, and the percentage decline may widen as updated information is published, said Matthew Cowie, an analyst for New Energy Finance in London. Carbon permits dropped as emissions output was “more decoupled from economic activity than forecast,” Cowie said.

Power Emissions Drop

Emissions from EU power utilities dropped by a record 2.9 percent last year, even as Germany shut nuclear power stations, according to the data.

Power emissions decreased by 32 million tons to 1.1 billion tons as utilities used more-efficient plants, Cowie said.

“With power demand down 4 percent from 2010 to 2011, the emissions intensity of power rose slightly overall, but this was mostly as a result of a drop in nuclear and hydro power production,” he said. Emissions intensity is a measure of the carbon-dioxide produced for each unit of electricity.

For fossil-fuel power generation in isolation, “the emissions intensity actually dropped by 0.74 percent, as more efficient coal-and-gas power stations replaced the output from older plants,” Cowie said.

German power emissions dropped 1.9 percent, according to the data. In March last year, the nation shut its nuclear plants after a tsunami measuring more than 15 meters (49 feet) high overwhelmed a facility at Fukushima, Japan, causing a meltdown there.

Prices May Plunge

Carbon permits may plunge from current levels to 3 euros as traders realize the bloc won’t change the program’s rules, said UBS AG.

“We expect the carbon price collapse to accelerate from here,” Per Lekander, an analyst for the bank based in Paris, said today in an e-mailed research note before the price fell to its record. “Potential sellers have held off selling ahead of the yearly emissions data.”

Deutsche Bank AG boosted its estimate of the 2020 surplus of allowances and United Nations credits in the EU carbon market by 47 percent, after the emissions output dropped.

The market will have an oversupply of about 1 billion tons by the end of the decade, compared with an earlier estimate of 681 million tons, according to an e-mailed research note from analyst Mark Lewis in Paris.

Last year’s drop in emissions “underlines the urgent need for action to be taken by the EU authorities to re-establish scarcity,” Lewis said in the note.

UN Certified Emission Reductions for December dropped 11 percent to close at 3.41 euros a ton. Its record of 3.36 euros was hit on Jan. 16.

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