LONDON, March 23 An escalating political row over the inclusion of airlines in the European Union emissions trading scheme is eroding confidence in the world's biggest carbon market and anchoring prices near record lows, analysts and traders said on Friday.
India on Thursday joined China in asking its airlines to boycott the EU carbon scheme, while Boeing threw its weight behind rival Airbus in a growing chorus of opposition against a scheme that will charge airlines for their emissions.
Rising tension over aviation is a thorn in the side of a carbon market already oversupplied with hundreds of millions of permits and flagging demand, as the euro zone's fiscal crisis crimps economic growth.
"It all adds to the poor sentiment around carbon," Mark Owen-Lloyd, of carbon and energy trader CF Partners, told Reuters. "It's not helpful, since markets like certainty."
Benchmark EU carbon prices have shed around 20 percent since the start of the month.
On Thursday, they fell below 7 euros a tonne for the first time since January 23, and were trading around 6.80 euros on Friday, still above the 6.30 record low hit last December.
The EU emissions trading scheme (ETS) sets a cap on carbon dioxide emissions from around 11,000 power and industrial plants across the 27-nation bloc.
All airlines using EU airports had to join the scheme from January 1, although their charge for emissions will not be known until next year.
Matteo Mazzoni, analyst at Nomisma Energia, said the aviation sector is likely to demand between 20 million and 50 million carbon permits to comply with the ETS in 2012, a relatively small number compared with the glut of permit supply.
But any absence of such demand could affect carbon prices if the EU backed down, Mazzoni said, adding: "We still think this is unlikely."
EU Climate Commissioner Connie Hedegaard has said the EU will stand by its law unless the United Nations' International Civil Aviation Organization formulates a global plan.
"Certainly the intensification of opposition does increase the political stakes, although the EC (European Commission) does look like it is holding firm," said Trevor Sikorski, head of carbon research at Barclays Capital.
Given uncertainty about how the EU tackles oversupply in the carbon market, he said: "The drip of opposition on aviation certainly colours sentiment to the more bearish side."
The risk of the aviation sector exiting the cap-and-trade scheme is being priced into the market, said Emmanuel Fages, a carbon and energy analyst at Societe Generale.
He said the impact could hit carbon prices by 2 euros or more, adding: "Nobody is buying because of this risk."