Carbon Drops to Second-Lowest Close After EU Permit Sale Fails

European Union carbon permits dropped to their second-lowest close ever, after the bloc canceled an auction of permits for the first time as bids failed to reach a secret reserve price.

The sale was called off because the price would have cleared “significantly” below the prevailing market rate, according to European Energy Exchange AG, the unit of Deutsche Boerse AG that runs the auction. EU allowances for delivery in December fell 5.6 percent to close at 3.73 euros ($4.86) a metric ton on London’s ICE Futures Europe, having earlier dropped as much as 6.1 percent. The contract closed as low as 3.42 euros on Jan. 31.

Carbon has plunged almost 90 percent in the past five years as the euro area’s second recession since 2008 cut industrial demand for permits, contributing to an oversupply that EU lawmakers are struggling to fix. Failed auctions may push the cost of emitting carbon dioxide even lower as unsold credits are held over for the next four sales under EU rules.

“There are three potential negative signs from this failure,” Milan Hudak, a carbon analyst at Virtuse Energy sro in Prague, said today by e-mail. “It was a relatively small auction, it was the first cancellation of an EU-wide sale, and as prices did not stay down for long, it seems the market can live with cancellations.”

The EU’s carbon system gives and sells allowances to factories and utilities, which must surrender enough permits to cover their discharges of carbon dioxide or face fines. This year, nations from Germany to Greece began selling more than 40 percent of their allowances in auctions instead of granting them for free.

Supply Boost

The EU sells permits on EEX three times a week on behalf of 24 member states. Germany sells permits separately on EEX every Friday, while the U.K. auctions allowances once every two weeks on ICE Futures.

Germany had two auction failures this year, on Jan. 18 and Feb. 22, when bids didn’t reach the reserve price.

Today’s 3.5 million of unsold EU permits will be distributed equally over the next four auctions, adding about 870,000 tons to sales scheduled from March 14 through March 21, according to New Energy Finance.

Flanders, the Belgian region, today sold 2 million tons of Phase 2 permits on EEX that are valid to cover emissions for the five years through 2012.

Carbon traders face more supply from EU nations that have until April 30 to sell excess Phase 2 allowances reserved for new entrants.

“Further cancellations are likely, with no immediate news in sight about backloading prospects and around 30 to 40 million tons of Phase 2 new entrant reserves still to be sold by April 30,” Konrad Hanschmidt, an analyst at New Energy Finance in London, said by e-mail.

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