EU carbon prices seen on track to recover

LONDON Fri May 8, 2009 8:07am EDT

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LONDON (Reuters) - A recent boost in prices for carbon permits under the European Union's Emissions Trading Scheme points to a recovery from a sell-off earlier this year when prices fell to a low of 8 euros, analysts and traders said.

The EU ETS caps carbon emissions from factories and utilities in the 27-nation bloc and issues an annual quota of emissions permits to firms, forcing them to buy from others if they emit more carbon dioxide than allowed.

Cash-strapped industrial companies sold their permits, called EU Allowances (EUAs), in the economic slowdown to raise funds, causing prices to drop to a low of 8.05 euros ($10.79) in February from nearly 31 euros last July.

Prices have been slowly gaining ground since then and climbed above a 4-month high of 15.25 euros on Friday.

"We are climbing to correct an exaggerated fall to 8 euros," Jean-Francois Cauvet, trader at Sagacarbon in France, said.

Carbon traders attributed higher prices to the return of compliance buyers like utilities, which has brought more balance to the market.

"People have now covered short positions so there is more balance on the market now," said an emissions trader.

The EU Commission released 2008 preliminary emissions data in April which showed that the EU ETS was at least 40 million tonnes short of EUAs.

MORE BALANCE

Compliance buyers were largely absent from the sell-off earlier this year. They have returned in recent months to hedge power sales, which has helped to lift prices.

"We are getting more realistic price levels based on the return of utilities as an underlying consistent buyer. Credit-crunched companies are also in less of a panic than they were before," Louis Redshaw, head of environmental markets at Barclays Capital, said on a recent conference call.

The fact that the economic slowdown was not as catastrophic as feared also meant there was still demand for carbon permits.

"The recession is not the end of the world that some people thought. People are still turning on their lights, there is still power demand, so we still need emissions permits. It's not so much a case of people being bullish, simply a case of not being bearish anymore," said the trader.

Analysts said recent gains were an encouraging sign for the market's recovery prospects but most expect range-bound trading between 15-16 euros to continue in the short-term.

"I would be quite cautious around 15-16 euros. We will probably face a correction on the equity and oil markets in the coming weeks so carbon prices could retract to around 12.50-13 euros," Cauvet said.

Deutsche Bank analyst Mark C. Lewis said in a report this week that prices should rise to around 16-18 euros over the next 12 months as German generators, many of which burn coal and require more permits than other utilities, start forward-selling power for 2013 in mid-2010.

(Reporting by Nina Chestney; Editing by William Hardy)

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