INTERVIEW - EU Carbon Market Likely in Surplus, Bearish - Barcap
Date: 09-May-06
Country: UK
Author: Gerard Wynn
The price of permits -- or carbon credits -- could then fall as low as 5 euros, having already collapsed to 12 euros on Monday from a peak of 31 euros three weeks ago, Redshaw said.
Such a price fall would almost certainly trigger further drops in power prices across Europe.
The European Union last year handed its heavy industry the tradeable credits at the launch of its carbon market to cut emissions of heat-trapping carbon dioxide (CO2).
Crucially for the market to work there had to be fewer credits than actual emissions, to drive pollution cuts, but this is now looking unlikely.
"Based on the trend we're seeing we'd expect the whole market to be long in year 1," Redshaw said. A UBS report last Friday also saw the market long on credits.
Already a clutch of EU countries have reported their 2005 carbon emissions, and all but Spain revealed emissions below their permit quota, triggering the recent price collapse.
The European Commission will publish data on remaining countries on May 15.
Redshaw saw a price fall to as low as 5 euros a possibility, but did not expect a complete collapse yet because of continuing uncertainty about future energy and therefore carbon demand.
At the end of every financial year companies included in the scheme, such as power producers, have to balance their books, having one carbon credit for every tonne of emissions.
Some are happy to buy at present prices, despite the bearish news of credit surpluses and a possible price collapse, just in case for example a cold winter increases demand for power and pushes carbon credit prices back up.
"Buying carbon now is a hedging strategy. (And) There's still plenty of value -- you can make margins on producing electricity (at a 12 euro carbon price)," said Redshaw.
HEDGE
Ultimately the balance of emissions and permits would only become clear at the end of the first phase of the EU trading scheme in 2007, and only then could the price collapse to near zero, he said.
The market is currently awaiting news from big economies such as Germany, Britain and Italy to discover the overall EU carbon market position for 2005, whether or not it is in surplus.
But according to Redshaw the near to medium-term prospects for carbon credit prices depended on how long it took power firms to hedge themselves fully.
"When they stop buying there could be more weakness," he said.