LONDON A sharp fall in carbon emissions last year across the European Union's emissions trading scheme underlined on Thursday the impact of recession on industry.
Preliminary EU data showed emissions across the scheme fell 11.2 percent, with some industrial sectors down at least 30 percent, and Estonia, Romania, Hungary, Spain and Italy registering bigger national tumbles.
"It reflects the impact of a very deep recession on output, and a greening of European power in a move toward gas and renewables," said Barclays Capital analyst Trevor Sikorski.
Power demand was down 5-6 percent last year but the electricity generation sector's carbon emissions showed a steeper 8.5 percent drop, underlining a move to zero carbon wind and low-carbon natural gas.
The EU emissions trading scheme (ETS) limits the carbon emissions of over 12,000 factories and power plants, covering 44 percent of EU emissions, and is meant to drive the 27-nation bloc's compliance with targets under the international Kyoto Protocol.
The drop in emissions, widely forecast by analysts, reinforced expectations that companies will have more permits called EU allowances (EUAs) than they need during the whole second trading phase of the scheme from 2008-2012, continuing a surplus seen in the first period from 2005-2007.
Carbon prices as a result are too low to drive investment in more expensive green technologies such as carbon capture and storage, fitted to the smokestacks of coal plants.
The highly polluting steel industry has in particular accrued valuable windfalls of surplus permits.
"They got something for nothing and they're worth something, so it is a windfall profit if they sell them today," said Deutsche Bank analyst Mark Lewis.
He estimated a roughly 115 million tonne surplus of EU allowances (EUAs) from 2008-2009 for the European steel sector, worth 1.5 billion euros ($2.02 billion) at Thursday's prices.
Low prices, surpluses of permits and controversies including tax fraud and re-selling of used permits have damaged the reputation of the EU carbon market, as similar proposed cap and trade schemes stall in the United States, Japan and Australia.
Supporters say EU carbon prices will bite again when the economy recovers and oil and gas prices rise, and so drive power generators to switch from coal to less carbon intensive gas.
"For the next year, two years, gas prices in Europe will stay low. I have big doubts they will stay low further out," said Lewis.
EU carbon prices closed up nearly two percent at 13.08 euros a tonne on Thursday, boosted not by the data but by higher crude oil and German power prices, traders said.
Benchmark prices for phase 2 permits rose by 2.4 percent over the first quarter of 2010, but are still well below 2009 and all-time highs of 16.04 euros and 29.69 euros respectively.
Last year cash-strapped companies sold their excess permits on the spot market to boost their balance sheets, a trend which pushed prices to an all-time low of 8.05 euros in February 2009, but a repeat of that sell-off is not expected this year.
The European Union's executive Commission said the data published on Thursday included at least 80 percent of all emissions covered by the scheme.
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(Reporting by Michael Szabo, writing by Gerard Wynn, Editing by Anthony Barker)