24 November 2008

Carbon Credits Market Crashes

The market for emission permits is beginning to feel the repercussions of a global recession, according to market-watchers IDEACarbon. Contracts in the EU program - the worldÃ¢â¬â¢s largest - closed at an 18-month low on Friday.

The idea is that if carbon-emitting fuel is at a premium and used prolifically, carbon credits increase in value. Fuel reduces, so do carbon credits.

Now in its second phase, the programme depends on emitters buying permits (EU Allowances or EUAs) when they exceed their government-appointed emissions quotas. Those that emit less, meanwhile, can sell surpluses back into the market for a profit.

But, with industry operating on a lower gear due to the global slowdown, IDEACarbon warns the marketÃ¢â¬â¢s allowance-shortfall could halve between 2008-2012.

In December 2007 IDEAcarbon estimated the Phase II shortfall in EUAs would be 206 million tonnes per year of CO2 equivalent. However, the onset of recession has cut this forecasted shortfall by 44% to 115 million tonnes per year between 2008 and 2012, according to IDEAcarbonÃ¢â¬â¢s latest figures. Alessandro Vitelli, Director of Strategy and Intelligence at IDEAcarbon said: Ã¢â¬ÅâœOur latest forecasts suggest EU industrial output will grow at just 1% in 2008, and shrink by 0.7% in 2009.

This will reduce the level of emissions from industry across Europe, and therefore cause a drop in the shortfall of credits available. After 2009 we predict output growth will revert to a positive trend.Ã¢â¬~

IDEACarbon goes on to say it is already seeing companies selling-off surplus EUAs they may otherwise have retained to raise short-term cash. So far, prices have fallen from a peak of Ã¢'š~¬29.33 on July 1st to Ã¢'š~¬17.40 on October 28th and Ã¢'š~¬15 today.price collapse remains a perpetual fear for the Carbon market. Over-allocation of permits in the systemÃ¢â¬â¢s first phase ended in exactly that - contracts trading near zero from April 2006 until the schemeÃ¢â¬â¢s close at the end of December 2007.

This time round, however, IDEACarbon sees a short- to medium-term price floor of around Ã¢'š~¬15.00 for the front-year EUA contract.

Patrick Birley, CEO, of the Climate Exchange - in which EU emissions contracts are traded - agrees itÃ¢â¬â¢s not surprising prices would be vulnerable to a global recession. However, he adds, the recent sell-off could be the result of more than just lower industrial output. He tells FT Alphaville:

There is also a strong correlation between oil and emissions prices and this has also been a factor. It is worth noting that the IDEAcarbon article seems to suggest that CER prices will not be as badly impacted - they are still subject to new demand from countries who are introducing cap and trade mechanisms for the first time (such as Canada, NZ, Australia and Japan).

CERs are Certified Emission Reductions as traded under the the Kyoto Protocol offsetting system.

IDEACarbon states that while recession may discourage governments from purchasing CERs, on the supply-side, it could encourage developers to hold back sales until prices recover. In this scenario a lack of CERs could help stabilise prices at around a Ã¢'š~¬1.00- 2.00 discount to EUA prices. This in itself could provide vital support to the European market and hopefully avoid another price collapse.

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