EU Carbon Drops at Expiry as Emission Reductions Rise Record 42%

European Union carbon permits dropped to an 11-day low and United Nations Emission Reduction Units posted a record one-day gain as the contracts expired.

EU contracts for December fell 1.5 percent to close at 6.47 euros ($8.52) a metric ton on London’s ICE Futures Europe exchange. ERUs jumped 5 cents to 17 euro cents a ton, while Certified Emission Reductions for this month gained 10 percent to 34 euro cents.

EU carbon has lost 12 percent in the past year as flagging economic growth sapped demand and supply of UN offsets surged. A proposal by the European Commission to temporarily delay the sale of 900 million metric tons of carbon allowances in the three years through 2015 to fix the glut poses a big risk to the bloc’s industry, Germany’s Economy Ministry said today. That statement may lower the chance of regulatory intervention in the first three quarters of next year, keeping carbon prices muted, Barclays Plc said today in an e-mailed research note.

The most the EU will probably be able to temporarily remove from the market next year has shrunk to about 200 million tons from 500 million after nations last week failed to agree on the supply plan, according to Trevor Sikorski, an analyst at the bank in London.

“This suggests that the regulatory proposal will now need to be adjusted,” he said.

Germany’s Economy Ministry said the proposed tightening was “a big risk for the competitiveness of German and EU industry,” according to its report.

Welcome Drop

Industry needs a long-term, reliable legal framework to plan investment and the commission’s proposals amount to “exactly the opposite” as they would make cost planning “incalculable,” the ministry said.

The plan, known as backloading because supply would probably return to the market later in the decade, would drive up power prices too, the ministry said. Because of the bloc’s debt crisis and weaker economic outlook, the drop in carbon prices “is to be welcomed,” the ministry said.

It said its position is different from the nation’s Environment Ministry, according to the report. That department argues that without intervention carbon prices may not rise through 2020.

As part of their bid to curb the glut, EU regulators may not be able to ban Russian ERUs before April 30 because policy changes usually take longer than that, said Climate Mundial Ltd.

EU nations are considering eligibility of ERUs approved directly by nations including Russia and Ukraine under a process known as Track 1. The Dec. 14 record low of 12 cents was “a perverse reaction” to the potential ban, Daniel Rossetto, managing director of Climate Mundial, said by e-mail today. The commission’s plans are often challenged legitimately and need to be revised, he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE