Carbon in Worst Quarter Since 2011 Set for Rescue VoteMathew Carr
Europe’s emissions market is likely to be left all but broken should the region’s parliament fail to agree next month on combating the surplus of carbon permits, after the biggest quarterly slide in prices since 2011.
Allowances, which have plunged 28 percent this year to 4.81 euros ($6.20) a metric ton, will average 5 euros in 2013, according to the median forecast of five analysts surveyed by Bloomberg this week. Prices will probably drop below 2 euros if the European Union doesn’t enact a November plan to delay the sale of some emission rights, according to UBS AG.
The euro area’s second recession since 2008 has cut demand for permits, exacerbating a glut that drove prices in the world’s biggest greenhouse-gas market to a record low in January. Europe’s parliament votes April 16 on the first part of plan by the region’s regulator to support prices by withholding some allowances over the next three years and releasing, or backloading, them into the market at the end of the decade.
“If the plan fails to clear the vote, backloading’s over,” said Konrad Hanschmidt, an analyst for Bloomberg New Energy Finance in London who correctly predicted in November carbon would fall to record lows in January. Rejection of the proposal will weigh on prices and damage the market as “some brokers might find it difficult to continue,” he said.
The last time permits retreated so much in any quarter was in the three months through December 2011, when they lost 32 percent on London’s ICE Futures Europe exchange.
Carbon for delivery in December slumped to an unprecedented 2.81 euros on Jan. 24 after the parliament’s industry committee recommended rejecting the backloading proposal. It was as high as 9.47 euros in November, when the European Commission unveiled its plan to fix the glut.
Offset credits in the United Nation’s Clean Development Mechanism have fallen even more. They were at 33 euro cents in London today, down 93 percent from a year ago. EU emitters can use UN credits to offset some of their emissions.
The EU’s 54 billion-euro cap-and-trade system, introduced in 2005 to help meet greenhouse gas-reduction targets under the 1997 Kyoto Protocol, imposes limits on about 12,000 power plants and factories. The program allocates permits to companies that must surrender enough allowances to cover their discharges of carbon dioxide or pay fines.
The commission’s plan includes delaying the sale of allowances covering 900 million tons, or 45 percent of a year’s supply. The goal is to reduce a glut that may exceed 1.5 billion permits by the end of 2013, Jos Delbeke, the commission’s director general for climate, said in February. Unless the proposal gets the consent of the parliament at next month’s vote, it will lapse.
The parliament upheld in a March 14 vote a recommendation to include a reference to carbon-market intervention in a non-binding report by the assembly on EU energy policy. The ballot wasn’t about climate policy.
The backloading proposal still faces opposition from the European People’s Party, the biggest of seven groups in the assembly, because it undermines predictability for investors and leads to higher energy prices, the group said Feb 25.
“It’s time the EU gave a clear, unequivocal signal to the market that they’re prepared to fix the oversupply after months of prevarication,” Mark Meyrick, a carbon trader at Eneco Energy Trade BV, said by phone from Amsterdam. “A 4-euro price isn’t going to change anyone’s emitting behavior.”
Permit prices may collapse should lawmakers fail to agree on backloading, said Per Lekander, an analyst at UBS in Paris who forecast in November 2011, when prices were above 9 euros, that carbon would drop to as low as 3 euros within two years.
Average 2013 price forecasts in the Bloomberg survey, assuming parliament backs the proposal, ranged from New Energy Finance’s 4.1 euros to Societe Generale SA’s 6.5 euros. All analysts in the poll predicted the EU will probably agree to backloading.
If backed by the parliament next month, the draft law change will be negotiated between assembly representatives and national governments, who need to sign off on the proposal. Once adopted, it will pave the way for member states to vote on a regulation that sets out the details of backloading.
EU Climate Commissioner Connie Hedegaard is confident the proposal will be enacted as policy makers realize that doing nothing may lead to the demise of Europe’s carbon trading program, she said in an interview in Brussels yesterday.
The assembly’s environment committee, which leads the work on the commission’s proposal in the Parliament, backed the carbon market rescue plan in a non-binding ballot in February by 35 votes to 28, with two abstentions.
If absentees in the March 14 ballot toe the party line next month, the backloading proposal will probably fail, according to Jens Teresniak, an energy economist at Stadtwerke Leipzig GmbH, a utility in Leipzig, Germany. The April 16 result would be 359 against backloading, 355 in favor and 38 abstentions, he said March 20 by phone.
“We will see a price lift after a positive backloading vote, but it’s a close call” Nick Eagle, a carbon trader at Clean Energy Trading Ltd. in London, said yesterday by e-mail. “A definite decision not to support it will damage the market.”