Carbon falls to record lows, EU dreams of a fixed price

International carbon prices slumped to record lows overnight as new data revealed that European nations had reduced emissions more than expected. That ought to have been good news, but analysts say it will translate into an even bigger surplus of credits than anticipated, and there is little chance of a lift in prices in coming years without a change in policy.

“Analysts eat humble pie,” noted Matthew Gray, a research analyst in the carbon and energy division at Jeffries, as prices for European carbon credits (EUAs) slumped 11 per cent to a low of  €6.04 – beating a previous low of  €6.04 reached in 2006 – and international credits (CERs) slumped 7.4 per cent.

The Verified Emissions Data (CED) released by European authorities showed a 2.4 per cent drop in emissions in 2011, nearly twice the fall expected by analysts. A variety of explanations was given, including unusually warm weather and the economic downturn, but what surprised some analysts was the 3.1 per cent fall in emissions from the power sector when a 1.6 per cent increase had been anticipated, particularly after the closure of nuclear power stations in Germany.

In fact, German emissions fell 1 per cent overall, and emissions from its power sector were down 1.9 per cent. Fossil fuel generation in France slumped 11 per cent. Analysts said because France had completed only 25 per cent of its data, the fall could be greater.

Deutsche Bank analyst Mark Lewis said emissions from Europe may be 60 million tonnes below its estimates, and this was likely to have a ripple effect in coming years, and could lead to the anticipated surplus of credits by 2020 to balloon to more than one billion tonnes to the previous worse case scenario of 681 million tonnes.

Lewis said the data underlined the need for urgent action to be taken by the EU to “re-establish scarcity.” Efforts to increase the EU abatement target to 30 per cent from 20 per cent have been scuppered by Poland. Other measures that have been mooted, including setting aside some of the anticipated surplus, have also been opposed by countries such as Poland.

“Now more than ever, the only value in EUAs lies in their political optionality,” Lewis said. He cut the bank’s forecast price range to €5-7/tonne from €6-9/t previously. Gray agreed: “Any hope that the EU ETS could organically shake-off oversupply was officially crushed today, putting the spotlight back on supply reduction proposals.”

UBS analyst Per Lekander, a noted carbon market bear, repeated his previous forecast that EU carbon prices may fall to €3. He does not believe that the EU will change the program’s rules.

“We expect the carbon price collapse to accelerate from here,” he said in an e-mailed research note reported by Bloomberg. “Potential sellers have held off selling ahead of the yearly emissions data.”

The slump in the carbon price is frustrating companies that are looking to push into green investment or invest in emissions abatement projects, and some have even begun a push for a fixed price, or a price floor to be introduced – as Australia is adopting for its carbon scheme, and as the UK has recently adopted for its power sector.

Meanwhile, Reuters reports that exchange operator ICE Futures Europe has fined a subsidiary of Macquarie Group €19,000 ($25,500) for failing to have a registry account to take delivery of certified emissions reduction (CERs) the bank had bought. According to an ICE circular, Macquarie Futures USA, a branch of Australia’s Macquarie Group, held a long position of futures worth 345,000 credits upon the expiry of ICE’s November 2011 CER contract. Macquarie then instructed ICE’s clearing agent to send the credits directly to its client’s registry account rather than its own.

“(Macquarie) were informed that the correct procedure is for the clearing house to send the allowances to the clearing member’s registry account. (Macquarie) admitted that they had no such account at that time,” ICE said. “The clearing house eventually had to transfer the allowances directly to the client account.” Under ICE rules, CER buyers must “have and maintain … one holding account at a registry for each margin account exclusively for the transfer of CERs.” The fine amounted to the equivalent of 1 per cent of the value of the related contract.