EU EMISSIONS TRADERS GETTING BUSY

EU carbon investors cling to signs of economic recovery
Nina Chestney (w/Michael Szabo), May 13, 2009 (Reuters)

"The European carbon market, like its peers across energy and commodities, appears to be pinning its hopes on big-picture economic recovery and ignoring a weak demand outlook closer to home…Prices for permits under the European Union's Emissions Trading Scheme have nearly doubled since hitting a low of 8 euros ($10.90) in February.

"The permits, called EU Allowances (EUAs), reached a new 4-month high of 16 euros this week, before easing to around 15 euros…"

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"European Central Bank President Jean-Claude Trichet said this week that European economic growth was at a turning point and some countries were seeing a rise in gross domestic product…[T]he carbon market has mirrored equity and oil gains over the past month in reaction to some signs of an improving global economy, but the underlying factors affecting carbon's supply and demand balance are still bearish.

"A reinvigorated world economy would imply more energy consumption and industrial output, and therefore higher greenhouse gas emissions and more demand for carbon permits such as EUAs…

"Many carbon analysts foresee a market surplus in EUAs in 2009 and 2010 as the global downturn has crippled European industrial production, prompting them to reassess EUA demand…A surplus in the scheme's first phase (2005-2007) caused EUA prices to crash to zero. Data from the EU executive Commission published in April showed that companies emitted more CO2 then their allocated EUA quota in 2008…"

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"…[U]tilities and speculators could start to buy EUAs before the middle of next year in anticipation of a tighter market in the third phase (2013-2020), when many installations will have to buy a majority of their permits at auction…

"EUA prices have also not reacted as expected to recent bearish news, and that could affect…a new international climate treaty to replace the Kyoto Protocol after 2012, which faces a tight deadline for agreement in Copenhagen this December…In a recent report, Point Carbon analysts said prices are likely to fall again as utilities' hedging activity dies down. It forecasts an average EUA price of 12 euros for 2009."