Carbon offsets fall below 10 euros, new 2-year low

LONDON (Reuters) - International carbon offsets fell below 10 euros per metric ton for the first time since March 2009 early on Monday morning, but traders were unsure whether carbon prices were poised to drift lower or stage a rally.

A combination of slim buying and continued jitters over the economic outlook have seen carbon prices lose a third of their value in the past four weeks. An economic slowdown would curb pollution and demand for emissions permits.

The ultimate fear is for the robustness of the whole EU project in the event of a possible Greek and other sovereign defaults, given that emissions trading is a creation of EU states.

"Carbon could test the downside in a broader sell-off on EU concerns," Andrew Ager, head of emissions at Bache Commodities.

"Everyone is now looking at the downside."

The trading scheme caps the emissions of factories and power plants using a fixed quota of EU allowances (EUAs), while companies also have the option of offsetting their emissions using internationally traded certified emissions reductions (CERs).

Benchmark CERs for December delivery recovered on Monday morning to 10.3 euros at 0900 GMT, but were still trading at levels close to their cost of production, providing one possible resistance level to further falls.

"Very few people are going to go and sell (CERs) at these levels," said Ager.

"At these prices I think you will see a lot of stickiness in the market," said one trader who doubted any further major falls in the near-term.

Carbon prices have now fallen below levels justified by fundamental supply and demand, said traders.

Benchmark EUAs for December delivery fell to a new 27-month low early Monday morning of 11.7 euros before recovering to 12.2 at 0900 GMT.

"The market is quite scared. There are lots of financial players driving it down," said a second trader. "However, if we can get above 12.40 maybe we can get a run up back to 13."

"I think it will be power (market demand) that has to bring carbon up behind it rather than vice versa because the carbon market is pretty depressed."

But the end of June marks the onset of long European holidays, which traditionally sees a seasonal summer lull in EUA demand from utilities.

Failing buyer interest, EUAs could fall through more stops at 11.65-11.7 euros and so trigger further selling, said Ager.

Explanations for recent price falls have centered on an over-supply of EUAs since the launch of the market in 2005, which would widen if economic output slowed. In addition, EU plans to auction extra EUAs may see higher than expected supply.

Meanwhile, resistance from international airlines to joining the EU scheme next year could see a compromise deal where this expected source of extra demand disappeared.