European carbon price set to bloom in Spring

LONDON Wed Apr 14, 2010 11:02am EDT

Cars drive along a road in central Brussels March 8, 2007. REUTERS/Yves Herman

Cars drive along a road in central Brussels March 8, 2007.

Credit: Reuters/Yves Herman

LONDON (Reuters) - European Union carbon prices could be set to rally through the second quarter, after they broke through a key price milestone on Wednesday, as energy prices firm and the economy shows signs of improving.

Carbon permits traded under the EU's $100 billion emissions trading scheme (EU ETS) have been stuck in range-bound trade between 12 and 15 euros a tonne since last September, due to the effects of the economic slump.

This is a far cry from prices of 30 euros in the summer of 2008 and has prompted criticism of the scheme for not spurring more investment in cleaner, renewable energy technology.

EU carbon permits (called EU Allowances or EUAs) hit a 2010 high of 14.14 euros ($19.31) on Wednesday, a key milestone which traders said could trigger more gains.

"We could jump up through 15 euros and start the merry journey back up," said Andrew Ager, head of emissions trading at Bache Commodities.

Improved EU industrial production figures and stronger economic indicators coming out of the United States are giving investors more confidence, Ager added.

Data published on Wednesday showed EU industrial production rose by 0.7 percent in February, 3.5 percent higher than the same month in 2009, while U.S. gross domestic product expanded at a 5.6 percent annualized rate in the fourth quarter of 2010. The OECD expects first-quarter 2010 GDP growth at 2.4 percent.

Traders said EU carbon prices, which are up 10 percent since March 25, have gained mainly on the back of stronger crude oil and German power prices. Benchmark futures for both are up some 6-7 percent in that time.

Power companies have also started their hedging season, buying carbon permits as far ahead as they sell electricity, which is around three years.

Even bearish data showing emissions across the EU ETS fell a higher-than-expected 11.2 percent last year failed to dent carbon prices.

The EU ETS imposes a cap on emissions from factories and power plants in the 27-nation bloc using a fixed quota of EUAs.

UP, UP AND AWAY?

EUAs could rise to at least 14.50-15 euros in the second quarter if strong energy prices and the market's bullish mood continues, trader said.

"My target is 16 euros for the end of the second quarter. We are in a bullish mode -- the moves in open interest, higher volume -- all suggest a move to a higher value," said Brett Genus, broker at Evolution Markets.

Open interest on the European Climate Exchange's Dec-10 contracts, at around 163 million tonnes, is up over 50 percent since the end of 2009 and daily trading volume on the futures is averaging over 10 million tonnes in April, up from 6.3 million per day in March.

While the mood among market players is overwhelmingly bullish, some are more reluctant to predict prices will be able to break out of their narrow trading range this year.

"I don't see prices going above 15 euros before the fourth quarter," Nomisma Energia analyst Matteo Mazzoni said.

"The economy is still far from showing structural signs of recovery and part of the recent oil spike is probably just due to short-term speculators."

Only a very clear signal, such as a European Union move to a 30 percent emissions reduction target from 20 percent or the U.S. passing a climate bill which introduces a cap-and-trade scheme would push prices much further.

"We could see 16 euros then but it would still not be sustainable," said Sanjoy Dutta, director at UniCredit Markets and Investment Banking.

(Editing by Sue Thomas)

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