Carbon Markets Are Under ‘Dark Cloud,’ Merrill Says

Carbon markets are under a “big, dark cloud” of uncertainty about future regulation and falling natural-gas prices, analysts at Bank of America Merrill Lynch said in a research report.
European Union carbon dioxide emission volumes from fossil fuels probably dropped 9.5 percent last year, reducing demand for EU permits, Merrill analysts including Sabine Schels said today. The EU market probably has 166 million too many allowances in the five years through 2012, they said. Prices are holding up because allowances can be saved and used after 2012, the report said, without giving a specific forecast. (Source: Business Week)

“A string of bearish signals is currently hanging over the European and global carbon markets like a big, dark cloud,” Merrill said. “Last week’s resilience in pricing seems particularly remarkable in light of the energy complex selling off and temperatures warming up.”
EU carbon prices fell 1.6 percent last week as benchmark crude oil dropped 5.6 percent. EU emission allowances declined 34 percent the past two years as the recession reduced demand in the world’s biggest greenhouse gas market.

Selling by factories with spare permits may weigh further on prices, Merrill said. “We do not foresee significant price upside over the next three-to-six months.”
Emission volumes may rise 5.6 percent this year because of the economic recovery and won’t return to last decade’s peak levels until 2013, Merrill said.

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The forecasts ranged from a deficit of 37 million tons of allowances in the period to a surplus of 360 million tons, the survey found.
EU permits for December rose 1.7 percent to 13.35 euros ($18.88) a metric ton on London’s European Climate Exchange as of 3:45 p.m. local time. They earlier today rose as much as 2 percent.

Increased demand for United Nations offsets currently used in the EU is less likely as climate talks fail to agree global greenhouse gas constraints, Merrill said. “With progress stalled in both the U.S. and Australia, there is now likely to be less competition for offsets going forward.”