Phase one price to fall further

Prices for the first phase of the European emissions trading scheme will trade on average at €3.00 throughout 2007 as the scheme is oversupplied by 341 million tonnes for the first three years, according to analysis by investment bank UBS.

The research note, published today, suggests that the first phase of the scheme, which runs from 2005-2007, will be 5.4 per cent oversupplied, and could end the year at €1.00. Currently, the December 2007 contract is trading at a record low of €4.45, down 85 per cent from its high recorded in April 2006.

However, UBS believes the price could sink further. “We… believe there is further downside risk in the 2007 CO2-price… We reduce our average 2007 CO2 price estimate from €5.00 per tonne to €3.00 per tonne. We believe that the carbon price could end the year at €1.00 per tonne,” the report said.

The scheme, which accounts for approximately 45-50 per cent of CO2 emissions from the European Union, was oversupplied by around 100 million allowances (5 per cent) during 2005, the first year of its operation. Data for 2006 will be made available on 15 May, although it is widely expected that this will also show a surplus.

“We expect the presentation of the 2006 emissions review on 15 May to be a key catalyst for carbon to continue the fall,” the report said.

Conversely, UBS expects the second phase of the scheme, which runs from 2008-2012 to be undersupplied, or short, by 8-11 per cent with prices to increase to €20.00 for the first three years of the phase and rising to €30.00 for the last two years.

The EC ruled on 10 national allocation plans on 29 November and has still to rule on the other 17 plans.

“In our view, this review showed a strong commitment to create the required shortage to make ETS phase two (2008-12) work. Applying the criteria (the) EU set out in its 29 November review also for the remaining 17 countries gives us an estimate that the ETS will be 167 million tonnes short for 2008 and 197 million tonnes per year as an average for phase two,” the report said.

However, UBS said there was some risk to its forecast due to the limit that the EU set on the use of imported carbon credits for compliance, such as certified emission reduction credits and emission reduction units from clean development mechanism (CDM) and joint implementation (JI) projects.

“Phase two ETS opens up for the use of low cost JI/CDM-allowances and we estimate that they are likely to cover 85 per cent of the emissions gap. (The) EU has set a limit on how much JI/CDM is allowed to be used, but this limit is set above the demand, so if we would underestimate the JI/CDM-supply there would be downside risk to our forecast,” the report said.

The price forecast, UBS said, was derived from estimated summer coal-to-gas switching costs during the summer months.

London

Source : Point Carbon 08-01-2007

Roman van Woerden

Product Manager