Analysis: U.N. carbon price set to fall further

LONDON Fri Oct 14, 2011 3:10pm EDT

Fumes from palm oil mills are released into the air in Luwu, Indonesia's South Sulawesi province August 7, 2010. REUTERS/Yusuf Ahmad

Fumes from palm oil mills are released into the air in Luwu, Indonesia's South Sulawesi province August 7, 2010.

Credit: Reuters/Yusuf Ahmad

LONDON (Reuters) - The price for U.N.-backed carbon credits is set to fall further, after hitting a record low early on Friday, as an over-supply of offsets looks unlikely to lessen and as poor economic growth dents confidence in the market.

The benchmark contract for certified emissions reductions (CERs) hit an all-time low of 7.13 euros ($9.77) early on Friday, before recovering slightly to 7.28 euros.

While CERs fell, European shares, the euro, oil and other markets rose on hopes for progress toward a solution to the euro zone debt crisis.

Traders said the carbon market was still suffering from a lack of confidence, in particular because a U.N. climate panel continues to issue new offsets regardless of a glut in permits in the EU's emissions trading scheme, the main market for them.

CERs, the world's worst performing commodity, have already lost nearly 40 percent of their value this year.

Further falls are still likely, especially if European Union carbon allowances (EUAs) fall below 10 euros. Some analysts pegged 7.05 euros as the next support level, and others see CERs slipping to 4 or 5 euros over time.

"If EUAs continue to go down and heavy issuance continues, CERs will still be under pressure," said Trevor Sikorski, head of carbon research at Barclays Capital, without citing a level.

Countries and companies buy CERs to meet emission caps under the U.N.'s Clean Development Mechanism (CDM), essentially paying for cuts in developing countries instead. But the financial slowdown has led to a global oversupply.

ECONOMY, SUPPLY

Industrial firms will increasingly turn to the carbon market as a source of short-term revenue or finance, analysts said, citing expectations for a 0.7 percent fall year-on-year in euro zone industrial production next year.

This means more excess EUAs are likely to come to market.

"If (carbon) credit markets tighten toward a recession, it will be all bets off on the EUA price," said Sikorski, which would impact the CER price.

The CER market has already been pressured by a record issuance this year in the face of a sluggish global economy. A record 254 million CERs have been awarded so far, well above 132 million in the whole of 2010 and 123 million in 2009.

Added to that, the European Union will ban the use of CERs from certain industrial gas projects from May 2013 in its emissions trading scheme due to criticism over their environmental integrity.

Around half of the total 750 million CERs issued since the start of the CDM come from banned credits generated by hydrfluorocarbon-23 (HFC-23) and nitrous oxide projects.

"HFCs are the biggest (proportion) of current issuance. We are seeing people push the price down, and it is hard to convince them to hold onto them and take some kind of discount," Sikorski added.

PROJECT DEVELOPERS

The latest slide in CER prices heaped further pressure on developers of CDM projects, particularly those listed on the London Stock Exchange.

By 1045 GMT shares in Camco, which is involved in around 140 CDM projects according to a Thomson Reuters Point Carbon database, had tumbled almost 4 percent on Friday to 9.75 pence a share, its lowest since February 2009.

Trading Emissions Plc, a fund that pools CDM offset credits from around 100 projects and tries to sell them to financial players and compliance buyers at a profit, fell 1 percent to 51.75 pence, near a record low of 48 pence reached on October 4.

Shares in Camco are down 41 percent and Trading Emissions 45 percent since the start of the year, broadly in line with the shrinkage in secondary CER prices since January.

This means that income from forward sales will be even more important for their balance sheets as revenue from spot sales dwindles further, said equity analysts.

"The general perception is that Trading Emissions has more of its portfolio hedged, and at higher prices, than Camco. Project developers will need good margins from forward sales to compensate for very weak spot prices," said Ken Rumph, an analyst at Nomura Code Securities.

"Once credits get delivered, this unlocks cash that has be used for collateral against forward contracts, so there is double benefit to selling credits hedged at good prices," he added. ($1 = 0.730 Euros)

(editing by Jane Baird)