November 23, 2011 / 1:52 PM / 8 years ago

EU CO2 underperfomance strains traders' faith

LONDON (Reuters) - European Union carbon prices fell to a new 33-month low on Wednesday, suggesting a loss of confidence and faith in the world’s biggest cap-and-trade scheme as it continued to underperform energy and commodities markets, analysts said.

High-voltage power lines are pictured in front of a coal power plant in the western town of Nierderaussem, Germany, November 9, 2011. REUTERS/Ina Fassbender

Prices of benchmark EU Allowances (EUAs) have halved since the start of June, as a combination of a slowing economy and an oversupply of carbon permits erodes demand.

EUAs were trading at 8.50 euros ($11.47) at tonne at 1310 GMT, down 6.6 percent on the day. Just minutes before, it was at a low of 8.45 euros, just 40 cents above a record low of 8.05 euros hit back in February 2009.

Benchmark U.N.-backed carbon credits hit a record low 5.99 euros on Wednesday, down 6.4 percent from Tuesday and off more than 50 percent since the end of May.

“People lost faith. Fewer and fewer traders believe in the market,” Matteo Mazzoni, carbon analyst at Nomisma Energia in Italy, told Reuters.

Mazzoni said that the worsening euro-crisis appears to have thwarted politicians’ efforts to tackle climate change and increase renewable energy to help slash greenhouse gas emissions.

“Inevitably, policy areas such as climate and renewables, which bring additional costs to industries and consumers, are now under question,” he said.

The EU emissions trading scheme (EU ETS), which caps the emissions of 11,000 carbon-intensive power stations and industrial firms in 30 countries.

UNDERPERFORMANCE

Reuters’ data shows the CO2 index price performance has hit a year low, widening the gap with the key European energy forward contracts, German 2012 base power, Dutch TTF 2012 gas and API2 2012 coal.

In early January all contracts in the index started at 100, but on Wednesday the German power was 104, API2 coal was 96.23, Dutch gas was 106.8, and carbon was at a year low 60.36.

Back in mid-June, the carbon, gas and power contracts were all hovering around 113, while coal was around 100.

Since then, however, the carbon market started to drop because of growing concerns about Greek’s debt crisis and an abundance of EUA supply to flood the market later this year.

The European Investment Bank is gearing up to start selling 300 million EUAs from a post-2012 reserve fund later this month.

Some analysts say the EU carbon market will likely be oversupplied with EUAs and international carbon credits for much of the trading period 2013-2020, and perhaps beyond.

“The carbon market is terribly oversupplied, hence there are no buyers and prices fall without support,” said Emmanuel Fages, the head of energy market research at Societe Generale in Paris.

“This is not the case, or at least not so much, for the other (energy) markets,” he said, referring to coal, natural gas and German power.

Coal and gas markets were holding up relatively well due to continued demand from Asia, which was also supporting German power, Fages added. Germany’s economy, the biggest in the EU bloc, is also healthier than most other member states.

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