Slump means EU industry carbon caps no longer bite

LONDON (Reuters) - Recession will not lead to a repeat collapse in European carbon prices, but plunging output means factories and power plants will be able to meet their climate goals for up to 10 years by buying carbon offsets.

The deepening threat of a serious recession has seen carbon analysts scramble to adjust their forecasts, as tumbling manufacturing output will cut carbon emissions, and therefore demand for and the price of carbon emissions permits called EU allowances (EUAs).

A narrowing in carbon emissions means European companies will now be able to meet all their climate targets under the EU emissions trading scheme by funding emissions cuts in developing nations, analysts said.

That is because a shortfall in EUAs will now likely be less than an EU-wide limit on imports of carbon offsets, called certified emissions reductions (CERs).

"From 2008-12 there's certainly enough CERs to balance the system, and going forward until about 2017 when you will need to get domestic European abatement," said Trevor Sikorski, head of carbon research at Barclays Capital.

"The expected EUA shortage has gone from 1 billion tons to about a quarter of that from 2008-12," he added. "It is putting off the day of internal emissions cuts."

PROLONG RECESSION

But Sikorski said that didn't undermine the environmental credibility of the scheme, but simply reflected the reality of falling industrial output.

"If you're meeting the (emissions) target through prolonged recession then the carbon price can be lower and you can meet your environmental goals more easily."

The EU emissions trading scheme (ETS) is the bloc's flagship measure to fight climate change and imposes a fixed quota of carbon emissions rights, or EUAs, on heavy industry including steel, aluminum and cement.

Investors are still wary of investing in EUAs and other carbon commodities after a price collapse to zero in 2006 and 2007, when it emerged that participating businesses had been given too many permits in the EU ETS.

A repeat EUA price collapse is not considered likely because companies can now use EUAs any time from 2008-2020, meaning they can save up -- or bank -- any surplus during temporary recession for use in later years, when there will be an expected shortage.

That was not the case in the first trading cycle of the scheme -- now dubbed an experiment -- from 2005-07, which made EUAs then effectively worthless.

"I don't really see a replay of Phase 1," said IDEAcarbon analyst Alessandro Vitelli. "The bankability of allowances means that future compliance obligations will set a carbon price going forward."

EUAs were trading at 15.85 euros ($22.79) late on Thursday and CERs at 13.50.

(Editing by James Jukwey)