Storm could follow calm in EU carbon market

By Nina Chestney - Analysis

LONDON (Reuters) - The European carbon market is bracing itself for a storm as another wave of selling by industrial companies is anticipated at the end of December or early January.

"Concerns over industrial surplus are so huge that all financial institutions are nervous," an emissions trader said.

The outcome of U.N. climate talks in Copenhagen this December will have little effect on prices for permits under the EU's Emissions Trading Scheme (EU ETS) as world leaders are not expected to agree to a new global climate pact.

Once a famously volatile commodity, carbon has barely moved in the past six months, trading between 12 euros ($17.98) and 15.50 euros ($23.22) a tonne since June.

Since 2005, the EU ETS has imposed a cap on carbon emissions from factories and power plants in the 27-nation bloc using a fixed quota of emissions permits, called EU Allowances (EUAs).

EUA prices should not move significantly out of a 12 to 15 euro range this year, analysts said. They were trading around 13.60 euros a tonne on the European Climate Exchange on Wednesday.

"There is no fundamental reason for prices to change before Copenhagen," said Emmanuel Fages, carbon and coal analyst at Societe Generale/orbeo.

"Heading toward the end of the year, people have more or less squared their permit needs and what will happen in Copenhagen has already been written," he said.

The $126 billion global carbon market is touted to grow to $2 trillion by 2020 if nations agree to a new climate pact curbing greenhouse gas emissions and the United States introduces its own federal emissions trading scheme.

Hopes for a treaty in December faded last week when delegates at U.N. climate talks in Barcelona said a deal may need an extra year or more, beyond the original December deadline.

"Expectations are low for Copenhagen. Unless there is a very big failure it will not have a negative impact on prices," said Deutsche Bank analyst Mark C. Lewis.

SELL-OFF

Industrial companies, such as steel and cement firms, were widely expected to dispose of the rest of their surplus permits for 2009 from October. The sell-off has not yet materialized but it could happen by 2010, analysts said.

Industrial firms sold EUAs in February to raise cash after the economic downturn reduced their output. This caused prices to drop as low as 8.05 euros. They still have a lot left to sell.

"This year will be the biggest surplus year due to the massive contraction in demand for steel and cement," Lewis said.