Collapse in carbon price accelerated by liquidity search

The European carbon market continued to plummet through January, with EU allowances (EUAs) reaching a record low for phase II of the EU emissions trading scheme (EUETS). By 20 January they had fallen to €11.50 per tonne of CO2 on the European Climate Exchange.

Market prices have been hit hard by deepening economic recession (ENDS Report 406, pp 15-16 ) since a high-water mark of €29.33/mtCO2e on 1 July 2008.

Selling has accelerated since the autumn, with falling industrial production slashing demand for allowances by sectors such as steelmaking.

Some companies covered by the EUETS may be selling surplus EUAs to obtain funds denied them by the credit crunch. Emissions Trading Association European policy coordinator Michela Beltracchi said there have been "massive sales of EUAs by firms in search of liquidity" in recent weeks.

Senior analyst Trevor Sikorski of Barclays Capital said downward pressures are likely to continue for some time and could even push EUA prices lower.

In the first half of 2008, EUA prices soared in line with rising gas prices, despite high levels of free allocation by member states.

Power generation was switching from gas to cheaper but more carbon-intensive coal, boosting emissions and therefore demand for EUA allowances.

But from mid-2008, with weakening industrial demand, wholesale gas prices fell rapidly, reducing emissions and hitting EUA prices.

Prices of international credits from the Kyoto Protocol’s Clean Development Mechanism have also been hit.

Agreement last month on phase III of the EUETS from 2013 (see pp 38-41 ) should eventually increase demand for allowances.

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