LONDON The benchmark contract for U.N. carbon credits hit a new record low of 7.13 euros ($9.77) a tonne on Friday, as the euro zone's worsening debt crisis and prospects of slowing economic growth hit the heavily-supplied offset market.
A deteriorating global economic outlook has put pressure on emissions permits which depend on robust industrial production to belch out greenhouse gases.
U.N. carbon offsets, the world's worst performing commodity, have been particularly hit because a U.N. climate panel continues to issue new offsets, regardless of a glut in emissions permits in the main demand market, the EU's emissions trading scheme.
Countries and companies buy certified emissions reductions (CERs) to meet emissions caps agreed under the Kyoto Protocol, paying for cuts in developing country projects instead, but the financial slowdown has left a global over-supply.
"There is a crisis of confidence," one trader said.
"From a logical point of view, CERs are close to marginal cost and selling would not make sense unless you are monetizing some of your portfolio."
"However the current economic woes facing Europe continue to grow and macro fundamentals are taking over," he added.
A prolonged period of low or no growth may make people consider their short-term cash flow and funding needs against long-term investments, prompting selling.
Benchmark CER prices struck 7.13 euros at 0732 GMT -- the lowest since February 2009 -- before recovering slightly to 7.18 euros by 0800 GMT.
The benchmark CER contract has lost almost 40 percent so far this year, prompting analysts to gradually cut their price forecasts to 2020.
The CER market has been pressured by record issuance of credits this year in the face of a sluggish global economy, putting pressure on price.
A record 254 million CERs have been awarded this year so far, well above the 132 million awarded in the whole of 2010 and 123 million in 2009.
Trader said after CERs had fallen through a key support level of 7.40 euros on October 4, they were expecting more downside.
Carine Hemery, market strategist at Societe Generale/orbeo, said technical signals were suggesting further falls were likely, with the next support level at around 7.05 euros.
However, European shares and the euro held roughly steady on Friday as hopes of progress toward a solution to the euro zone's debt crisis was tempered by a knee-jerk reaction to a credit rating downgrade for Spain.
World stocks measured by the MSCI All-Country World Index .MIWD00000PUS slipped 0.1 percent. ($1 = 0.730 Euros)
(Editing by William Hardy)