Carbon crash spurs price bottom debate

LONDON Thu Nov 24, 2011 9:29am EST

A wind turbine is seen behind utility poles in Tokyo July 27, 2011.  REUTERS/Kim Kyung-Hoon

A wind turbine is seen behind utility poles in Tokyo July 27, 2011.

Credit: Reuters/Kim Kyung-Hoon

LONDON (Reuters) - European and international carbon prices plunged to record lows on Thursday, prompting a debate about how low prices could go.

Carbon prices have lost half their value since June, knocked down by flagging demand for emissions permits and credits as the euro zone's crisis deepens.

The European Union's carbon market, which was valued at $120 billion last year, is also oversupplied with hundreds of millions of permits. It caps the emissions of some 11,000 power generators and industrial plants in 30 European countries.

Benchmark carbon permits, known as EU Allowances (EUAs), hit a record low 7.80 euros on Thursday.

Analysts and traders are now trying to figure out whether there is a bottom to the market, the EU's main policy tool to fight global warming.

"There is no 'hard' or real floor I'm afraid. Prices can go where they want," said Emmanuel Fages, an energy and carbon analyst at Societe Generale in Paris.

Per Lekander, an analyst at UBS, said the carbon price could bottom closer to 3 euros before it bounces back up - due to the supply and demand dynamics of the market.

"At that level the utilities will step in and buy as they sort carbon liabilities for years," he told Reuters.

But power generators, which are the main drivers of demand, have little incentive to buy now given the worsening economic situation.

Banks may be reluctant to step in as well, he said. "The market is massively oversupplied and given the difficult funding situation, banks cannot take carbon credits on their balance sheets."

The EU carbon market is gearing up for the start of sales of 300 million carbon permits from the bloc's post-2012 new entrants' reserve by the end of November.

Lekander's 3 euro prediction, announced last week, sparked a debate among analysts. His bearish outlook even triggered a rare response from the Climate Markets & Investment Association (CMIA), an international trade association.

Trevor Sikorski, an analyst at Barclays Capital, said EUAs falling below 6 euros "would take another deep European recession."

In a research note this week, he challenged the UBS floor price of 3 euros. "This would involve a massive discount to be placed on the future value of a right to emit, and that is unlikely to be in line with market participants' expectations of future value given the ability to bank permits," he said.

Matteo Mazzoni, carbon analyst at Nomisma Energia in Italy, told Reuters on Thursday that the EUA market could test 7 euros. He added: "Is there a natural bottom? Other than zero? I don't see any natural bottom."

In the U.N.-backed emission offset market, the front-year credit struck a record low of 5.30 euros on Thursday.

They were once supported by a so-called Chinese floor price of 8 euros, which was set by China on some Kyoto Protocol clean development projects located in the world's biggest emitting nation.

But that support hasn't held very well since the market breached 8 euros in August.

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