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EU Carbon Permits Drop as Natural Gas, Power Prices Decline

European Union carbon allowances fell as German electricity and U.K. natural gas prices dropped, curbing demand for pollution rights in the world’s biggest cap-and-trade system.

EU permits for delivery in December declined as much as 4.2 percent to 6.38 euros ($8.34) a metric ton on London’s ICE Futures Europe exchange in London. The contract closed 2.9 percent down at 6.47 euros.

U.K. natural gas for next month dropped 1.2 percent to 67.7 pence a therm, according to broker data compiled by Bloomberg. Carbon permits sometimes track gas because power utilities burning the fuel need half the permits compared with when they use more-polluting coal.

German baseload power for next year lost 0.4 percent to 44.95 euros a megawatt-hour, broker data show. Lower prices can reduce the incentive to sell electricity forward, curbing demand for CO2 permits.

The year-end price of EU carbon will probably be 8 euros a ton, assuming the bloc agrees to delay auctions of some permits in a strategy known as backloading, Matthew Gray, an analyst in London for Jefferies Group Inc., said today in an e-mailed note. Permits could slump to as low as 3 euros should the proposal fail, he said.

Ireland, which took over the six-month rotating EU presidency this month, is hoping to broker a compromise over the backloading measure, Reuters reported today, citing Environment Minister Phil Hogan. At a meeting of national climate experts in December several governments, including Germany and the U.K., said they were undecided about whether to back the proposal, an EU official said last month.

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