Excessive CO2 Supply Curbs May Push Prices Down, UniCredit Says

A decision by the European Union to delay auctions of too many carbon permits under a plan to curb oversupply could lead to a decline in emission prices when those allowances return to the market, according to UniCredit SpA.

The EU is considering a proposal to postpone sales of an as-yet unspecified number of carbon permits when the bloc moves to auctioning a bigger share of allowances in the next phase of its cap-and-trade system as of 2013. The supply of permits in the current 2008-2012 trading period will exceed estimated emissions by 1.6 billion metric tons, UniCredit said in a research note.

While the delay in proposed auctions, also known as backloading, can be a way of “buying time” it won’t create a long-term shortage of permits in the EU emissions trading system, UniCredit said.

“If the backloading volumes are too low or too high, enormous downside price pressure will materialize,” according to the note e-mailed today. “We consider a moderate backloading volume to be the most effective measure to temporarily reduce supply in the EU ETS.”

Should the EU decide to postpone 800 million permits at auctions starting in March 2013, carbon permits would trade at 9 euros a ton on average in the first half of next year and 11 euros in the second half, according to the research note.

EU permits for delivery in December fell 2.6 percent to 7.27 euros a ton on the ICE Futures Europe exchange in London today. That’s the lowest closing price since Aug. 10.

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