LONDON European factories are cashing in on an unexpected benefit from wilting output, selling surplus carbon emissions permits worth about 1 billion euros ($1.29 billion) to raise funds on the carbon market.
A recession in Europe will dent industrial output this year and this will sap energy demand and carbon emissions, leading to a surplus of permits among big polluters including steel and cement makers.
Companies from some of the European Union's most polluting industries are now raising funds on the carbon market to help them weather the credit crisis.
That has raised some uncomfortable questions about a scheme meant to fight climate change rather than subsidize companies during a downturn.
"This was not designed as a scheme to give corporates cheap short-term funding options in the face of a credit crunch meltdown where banks are not lending," said Mark Lewis, Deutsche Bank carbon analyst. "But that appears to be what's happening."
The EU trading scheme is meant to limit greenhouse gases by giving industry a fixed quota of carbon permits that can be traded.
The sell-off has sparked a collapse in carbon prices, which have fallen by up to a third this month and could drop as low as 5 euros from a peak of 31 euros last summer, analysts say.
The carbon price adds to the cost of burning high-carbon fossil fuels and a lower price undermines incentives for companies to cut emissions.
The price falls do not yet match a rout in 2006, when it emerged that EU states had given industry too many carbon permits, creating a glut that made them worthless.
The present surplus has arisen from recession and companies have been able to raise cash because they get their quota for free rather than have to buy these through state-run auctions.
EU leaders last month agreed emissions quotas through 2020 based on assumptions of economic growth, and backed concessions to industry that could allow companies to continue to get free allowances for a decade or more.
The present sell-off started in December and the main winners are cement makers, steel, paper mills and glass factories, carbon traders say.
"It's between 75-80 million to 150 million euros a day," said Jean-Francois Cauvet, a trader at Sagacarbon, subsidiary of French bank Caisse des Depots, referring to buying and selling in return for immediate cash on spot markets.
"I don't know why industrials would miss this opportunity," he added. "They're using it to compensate for the tightening of credit and the slowdown, to pay for redundancies."
A global carbon market has been growing fast, nearly doubling in value last year to about $120 billion.
Now the economic slump is doing the market's job, by limiting economic growth and emissions. Analysts say that the EU emissions cap will bite when economies grow again from 2010 or 2011, and stress that a lower carbon price has not changed the effectiveness of the carbon cap.
For some, however, the price collapse demonstrates that the EU scheme was too soft all along.
"It demonstrates that the targets after 2012 (to 2020) are too lax, especially in combination with a large use of carbon offsets," said Cambridge University's Karsten Neuhoff, referring to an option for companies to offset their emissions by investing in green projects in the developing world.
The potential for raising cash now is large.
The steel and cement sectors have a quota of EU allowances (EUAs) approximately matching their forecast output and emissions.
But West European iron and steel output will fall by about 14 percent this year compared to 2008 and EU cement production by 20-25 percent, analysts estimate.
That implies an EUA surplus this year of 66 million tons for those two sectors alone, worth about 750 million euros at Wednesday's carbon prices.
The EU executive Commission rejected the idea that selling surpluses hurt the integrity of the scheme.
"We are sure at the end of the day the price will ... provoke emissions reductions," said Barbara Helfferich, EU Commission environment spokeswoman. "If those companies were smart they would take those profits ... and invest them into greener technology."
While industrial companies are cashing in, some banks and carbon specialists are hurting.
EUAs are one of the worst investments so far in 2009, falling more than almost any other energy commodity or index of global stocks, compressing margins for companies which generate carbon offsets in the South for sale to companies and countries facing emissions limits in the North.
(Additional reporting by Michael Szabo and Jackie Cowhig, editing by Anthony Barker)