LONDON The European Union's Emissions Trading Scheme was at least 40 million tons short of carbon permits in 2008, analysts said after reviewing preliminary EU data on Wednesday.
Carbon market analysts said discounting incomplete data and comparing like-for-like figures between 2007 and 2008 showed companies emitted between 40 and 100 million tons over their allocated quota of emissions permits.
The scheme, worth $90 billion last year, is the EU's flagship weapon in its fight against climate change. Wednesday's preliminary data gave a first glance at the EU's industrial emissions for last year.
This is also the first time the scheme has registered a shortage of EUAs in its first four years, the preliminary data showed.
The EU handed out an excess of permits from 2005-07, undermining the scheme's goal of driving carbon cuts through creating a shortage of permits available to industry.
The scheme is supposed to force businesses to trim their contribution to climate change by becoming more energy efficient or switching from carbon-intensive coal to natural gas.
The data accounted for 10,417, or 85.3 percent, of the 12,215 industrial installations covered under the scheme, the European Commission said. 1,798 did not report 2008 emissions.
Carbon permits, or EU allowances (EUAs), under the EU's emissions trading traded up 63 cents or 5.4 percent at 12.38 euros a metric ton following the data's release.
The Commission's data is keenly watched by analysts and traders who are trying to estimate the balance of supply and demand for EUAs in the EU ETS, and therefore the price.
"This data is in line with our expectations, a 4.3 percent reduction in emissions year-on-year and a short position of 40 million tons for the year," Barclays Capital analyst Trevor Sikorski said.
"It hasn't changed the outlook for the scheme in any way."
Analysts said the state of the market in 2008 is the first indication of how carbon prices will fare through a recession which may impact EUA prices for several years.
It is likely that, as a result of falling industrial output and carbon emissions, the scheme will once again register an EUA surplus in 2009, analysts say, raising question marks over its effectiveness.
U.S. policymakers are watching the EU scheme closely as senators prepare to draft a climate bill, which is expected to be passed in the next two years.
Societe Generale's Emmanuel Fages calculated the market was short by around 100 million tons.
New Carbon Finance estimated that 2008 emissions fell by around 3 percent, but did not provide exact figures.
"Emissions from the energy sector alone fell 4 percent and the industrial sector is also down compared to last year," said Olivier Lejeune, an analyst at New Carbon Finance.
Excluding Poland and Hungary, which had not allocated any permits for 2008, the remaining raw data showed emissions of 1,768 million metric tons compared with an allocation of 1,659 million permits.
Analysts pointed out the allocation figures represent permits issued for free by the EU Commission, and may not include those auctioned or sold into the market by countries such as the UK and Germany.
Removing all incomplete entries showed 2008 emissions of 1,939.8 million metric tons versus 2,026.3 million metric tons in 2007 representing a reduction in emissions of 86.5 million metric tons from the 9,016 installations reporting complete data.
(Editing by Sue Thomas)