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ANALYSIS-Floor for EU carbon price seen at 15 euros

2008-11-17 17:14:15 GMT (Reuters)
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By Nina Chestney and Michael Szabo

LONDON, Nov 17 (Reuters) - European carbon emissions could fall to 15 euros a tonne, halving a two-year high hit this summer, if industrial output and crude oil prices fall further.

Carbon prices plummeted in early November and continued their drop on Monday to around 17 euros a tonne, a 19-month low. They have followed other commodity and energy markets lower in the face of a European recession.

Analysts see a potential low of 15 euros for EU carbon prices on a combination of lower industrial output, more emissions permits coming to market and falling oil prices.

Crude oil prices, which strongly influence carbon prices, hit a 22-month below $55 a barrel low last week.

Analysts said strong selling was pushing carbon prices lower as European companies, hoping to raise cash in the financial crisis, liquidate their EU emissions permits.

Analysts and traders predicted earlier this month that prices would go lower before they could rebound to above 20 euros a tonne [ID:nLV577819].

Carbon emissions futures for December 2008 delivery have not traded below 15 euros since March 14, 2007. The benchmark contracts have fallen some 42 percent since hitting the 2-year high of 29.69 euros a tonne in early July.

The EU Emissions Trading Scheme (EU ETS) gives installations a certain quota of emissions permits called EU Allowances (EUAs), and forces them to buy more to cover any carbon emissions surplus.

"In the near-term, 15 euros which is the price people paid for (carbon offsets imported from developing countries) is a technical floor," said UBS analyst Per Lekander.

Further cuts in industrial output would reduce emissions, thereby reducing demand for EUAs which would drive prices lower.

Added to that, many EU member states which have delayed giving industry their 2008 quota of EUAs are issuing permits now, significantly increasing the market's supply.

Italy said it will issue nearly 200 million EUAs this week, following Germany's allocation of over 300 million last week [ID:nLE64551]. The UK also plans to auction 4 million allowances on Wednesday and the Netherlands said it will distribute 86 million EUAs on Dec. 1.

FIRM FLOOR

Under current EU proposals, unused EUAs issued between 2008-2012 can be banked through to the scheme's third phase, which runs from 2013-2020.

As a result, analysts say is unlikely that the market will see the same over-suppy that led to a total price collapse in the scheme's first phase (2005-2007), as there is more incentive to hold EUAs than to sell them at current prices.

Barclays Capital's Trevor Sikorski said that a deep EU recession would still see a shortage of some 500 million tonnes.

"It is unlikely that the economic downturn will change the fundamental balance of the market," he said, adding that fuel-switching could also provide price support.

"EUAs could definitely go lower but there would be some support from fuel-switching at around 15 euros."

Cheaper prices for high-carbon fuels such as coal and oil would encourage power generators to switch from cleaner natural gas, which could force utilities to buy more EUAs.

"(The carbon price) depends on how much further coal falls. Coal demand in China has fallen through the floor. If coal keeps coming down, it is very difficult for people to ignore it as a fuel," said Alessandro Vitelli, a director at IDEAcarbon.

The market is also supported by EU policy, which requires companies generating CO2 emissions to buy permits.

"We shouldn't be too worried as policy support holds the market up. The EU said there was no 'sunset clause' for the EU ETS," said Vitelli.

"It's there and it's staying."

For additional news and analysis on the global carbon markets, go to http://www.communities.thomsonreuters.com (Editing by William Hardy

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