European carbon prices spike to 13-month high

London, 31 May: Prices for carbon dioxide in the EU hit their highest levels since April 2006 yesterday, largely due to utilities buying credits for Phase II (2008-12) of the region's Emissions Trading Scheme (ETS).

EU allowances for December 2008 delivery traded as high as €26 ($35) a tonne, but today slipped back to less than €22/t in volatile trading. "There is no clear indication of where prices should be," said a London-based broker.

In terms of volumes, the carbon market had one of its busiest days ever. More than 13.5 million tonnes changed hands on 30 May. In the last week, between 4.5 million and 7 million tonnes a day changed hands, according to traders and brokers.

Investment bank UBS last week published a report forecasting that prices in 2008 would reach €30/t, up from its previous estimate of €20/t. It cited demand from power utilities forward hedging their carbon and a tighter supply of carbon credits imported into the scheme from UN-approved Clean Development Mechanism (CDM) and Joint Implementation (JI) projects, which reduce emissions in developing and industrialised countries respectively.

"This is first time the figure [€30] has been bandied around the market for more than 18 months," said the broker, noting that the report had had a positive influence on market sentiment.

Milo Sjardin, lead analyst at London-based carbon market forecaster New Carbon Finance, said that utilities, which have tough caps under the EU ETS, are buying carbon to meet their compliance needs, but there is no selling from installations that may have excess credits but are uncertain of their position.

Also driving up the market in the short term was the lack of sufficient certified emission reductions (CERs), the carbon credits generated by CDM projects, he said. The lack of CER supply was due to uncertainties in the implementation of the Independent Transaction Log, the system that tracks trades in Kyoto Protocol carbon credits, and the fact that not enough CERs are being issued, he said.

"There's too much short-term buying and too little short-term selling. If you look at the fundamentals, prices should be more bearish across the phase than current levels," he said.

Sjardin predicted allowance prices of around €20-25/t in early 2008, but expected prices to fall during Phase II as more CDM and JI project credits came to market and more players were selling. "If you take a long-term view over Phase II, then €25/t isn't sustainable. But it is realistic in the short term given trading behaviour," he said.
Meanwhile, allowances for delivery in Dec '07 have settled in a band around €0.27 to €0.33/t, with traders and brokers reporting no interesting developments. Spot carbon traded at around €0.01 lower than Dec '07.

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