EU Carbon Permits ‘Worthless’ Without Change of Rules, UBS Says

Carbon-dioxide permits in the European Union emissions trading system, the world’s largest, are “worthless” without a change in the rules to tighten supply and curb a record glut, according to UBS AG.

EU allowances for delivery in December sank to a record 4.79 euros ($6.37) a metric ton on the ICE Futures Europe exchange today. The contract was at 4.86 euros as of 9:51 a.m. in London, extending its losses to 27 percent this year after low bids from utilities, factories and banks forced Germany on Jan. 18 to cancel a sale of permits for the first time.

“With current rules ETS won’t work until 2045, thus carbon is worthless,” Per Lekander, a Paris-based analyst at UBS, said in a research note today.

The price of permits in the EU emissions trading system, or the ETS, plunged about 80 percent since the beginning of 2008 as the economic crisis eroded industrial output. The limits on discharges were set before the euro area entered two recessions in four years. The program, which imposes emission caps on about 12,000 facilities owned by manufacturers and power plants, doesn’t allow any price floors or ceilings.

The European Commission, the bloc’s regulatory arm, will not get support from governments for its plan to temporarily cut oversupply by delaying auctions of some permits, according to UBS. The commission’s strategy, known as backloading, would postpone sales of 900 million allowances from 2013-2015 to 2019-2020 to help prices rebound.

EU nations and the region’s parliament have two options now: to “sit back and do nothing and see the market crash” or to support the short-term rescue plan to backload allowances, said Isaac Valero-Ladron, climate spokesman for the commission.

Act Swiftly

“I urge the member states and the European Parliament to act,” he told a briefing in Brussels today. “They have now the tools presented by the commission. They have to act swiftly and with determination.”

The glut has swelled to almost 1 billion metric tons, or almost half of the average annual pollution limit in the system at the beginning of 2012, according to the commission. The excess can be about 2 billion permits by the end of the current trading period through 2020 unless the EU tackles it, the regulator said last year.

“With the current emissions cap -- 1.74 percent reduction per year -- the ETS will be long each year until 2025 and it will take until 2045 before the current 1.5 billion tons surplus inventory has been eliminated,” Lekander said.

Changing the EU emission trading rules would require support from member states and the European Parliament. The bloc would have to amend the existing law or adopt new legislation to tighten the cap, accelerate the annual pace of greenhouse-gas reductions or introduce price management mechanisms.

Primary Supply

Primary supply of allowances rose this year as the EU moved to selling a greater portion of allowances after handing most of them to emitters for free in the 2005-2012 period. Governments are scheduled to sell 15.7 million tons of permits at auctions this week.

The decline in carbon prices means that polluters “got a grace period, no more,” Lekander said. “European climate policies remain intact and the CO2-constraints will eventually be re-established. This could for instance happen through a price floor in ETS or via a carbon tax.”

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