EU Carbon Sale Fails for First Time as Bids Miss Reserve Price

The European Union canceled an auction of carbon emissions permits for the first time as bids failed to reach the bloc’s 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 to a five-week low of 3.71 euros ($4.83) a metric ton on London’s ICE Futures Europe before paring the decline.

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.”

EU carbon for December was trading at 3.84 euros a ton as of noon on ICE in London.

The EU’s carbon system issues 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 giving them away.

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.

Carbon traders also face more supply from EU nations that have until April 30 to sell excess carbon allowances reserved for new entrants. The Phase 2 permits can be used to cover emissions made in 2012.

“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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