"EU carbon market will be long through to 2012"

Latest analysis predicts recession will result in oversupply of allowances during current phase of EU emissions trading scheme. Falling industrial output means the EU emissions trading scheme will face an oversupply of emissions allowances (EUAs) during the current phase of the market, which runs from 2008 to 2012, according to new research from Barclays Capital.
The price of EUAs has rallied to about €14 (£12) a tonne following the release of emissions data from the EU last week that appeared to be slightly better than some players in the market expected.
But according to Bar Cap, close analysis of the data suggests that the market will now face an oversupply of EUAs during phase II. "The phase is no longer short EUAs, rather it is moderately long by 23 Mt," says the report. "The market only becomes short again by 2012, when it will be balanced by the introduction of the aviation sector." (Source: BusinessGreen 17 Apr )

The recession has led to less demand for energy, and a collapse in production across heavy industries, such as cement and steel, all of which has resulted in falling demand for emission allowances and a drop in the price of EUAs to a recent low of less than €10 a tonne.

Initial studies of the EU data suggested emissions from facilities covered by the ETS emissions fell four to five per cent during 2008, but analysts are predicting that emissions will fall much further during 2009 as the recession continues to bite. "This is our view based on the macroeconomic situation," said Trevor Sikorski, director of environmental market research at Bar Cap.

Alessandro Vitelli, director of strategy and intelligence at IDEAcarbon agreed with the Bar Cap's analysis. "I think they're probably right," he said. "Look at the degree to which industrial production has collapsed. The market will definitely be long in 2009, and even if things get better in subsequent years, they will still be recovering from those levels."

In related news, statistics from Germany released earlier this month said that steel production in the country was down almost 50 per cent compared with last year.

And in a move that will provide further ammunition to critics of the ETS who claim that the emissions caps have been set too high, the EU data also revealed that falling production meant European steelmakers received more than $1bn-worth of carbon permits last year that they no longer required. One Belgian steel plant owned by ArcelorMittal reportedly received a windfall of $132m in unneeded credits.

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