Emissions traders bullish over EU climate proposal
LONDON (Reuters) - A series of energy and climate proposals announced by the European Union on Wednesday, including an overhaul of its flagship Emissions Trading Scheme, should push carbon prices higher in the long-term, traders said.
The European Union's executive favors major changes in the third phase of its Emissions Trading Scheme (2013-2020), including cutting the total amount of pollution permits by a fifth by 2020 and auctioning them to member states rather than distributing them for free, it said.
The ETS, now in its second phase running from 2008-2012, allocates a fixed quota of carbon credits, each allowing the bearer to pollute the equivalent of one metric ton of carbon dioxide. Member states are then free to trade credits among themselves.
EUAs, the carbon credits traded under the ETS, lost ground on Wednesday, as December 2008 futures on the European Climate Exchange closed 61 cents or 3 percent lower at 19.70 euros a metric ton.
The benchmark futures have lost almost 12 percent since Friday's close, though many attribute it to weakness in energy prices and uncertainty in the global economy.
Emissions traders said although Wednesday's proposals are generally bullish, most of them had been previously leaked and therefore the news was already priced into the market.
"The announcement concerns something that is quite far away... but it's bullish for EUAs," Societe Generale's Emmanuel Fages told Reuters.
The European Commission has aligned the EU-wide target for phase 3 of the ETS with the its pledge to reduce European emissions by 20 percent below 1990 levels by 2020.
In an investment note published by Societe Generale late Wednesday, Fages said EUA prices in phase 3 could exceed 35 euros a metric ton.
"The EU cap seems lower than what was forecast, giving the market an average of 1.85 billion EUAs to play with," a London-based emissions trader said, referring to the estimated number of permits to be issued annually by the EU between 2013 and 2020.
If a global successor agreement to the United Nations' Kyoto Protocol is in place by 2012, the EU has said it will up its target to 30 percent reductions by 2020, thus further reducing the total amount of credits in the market.
"If the EU goes with 30 percent, installations will have to make up the difference through abatement or by buying EUAs or CERs," the London trader said.
KYOTO CREDITS
Certified Emissions Reductions, credits issued by the UN to developing countries under its Clean Development Mechanism, can be bought and imported by companies in rich nations to help meet targets under the Kyoto Protocol.
"The EU proposals are even more bullish for EUAs if European imports of CERs are restricted, which seems to be the present stance of the Commission," Fages said. Continued...
