Isramart : Carbon markets under 'dark cloud'

Isramart news:
The future of carbon markets worldwide is under a dark cloud, a report by Bank of America Merrill Lynch concludes. The failure of the Copenhagen climate conference to agree decisive action to cut emissions, doubts over whether cap and trade legislation in the US and Australia can be passed this year and depressed demand in the existing European carbon market are all weighing heavily on the carbon trading outlook, the Merrill’s report said.

It forecast that CO2 emissions in the European Union would rise around 5.6 per cent this year as the European economy climbs out of recession, but this would still leave emission levels lower than their pre-GFC peak. EU emissions were estimated to have fallen 9.5 per cent in 2009 alone and the report says power sector emissions aren’t expected to return to previous levels for another three years. Subdued emissions from recession are undermining the EU ETS with the report forecasting that emission permits, EUAs, would now be in surplus by about 166 million tonnes across the five-year second phase of the scheme finishing in 2012.

Adding to the slide in demand are signs in recent weeks that the EU will stick with its 20 per cent emissions cut in the third phase up to 2020, given the failure of Copenhagen to agree strong developed country targets. Demand from speculators and hedgers counting on a tightened 30 per cent target is expected to add further weakness to the market. However, ability to bank EUAs now for the third-phase still provides some underpinning for the current market.

EUA prices have recovered some ground since a Copenhagen-induced slide in December but Merrill’s says it does not “foresee significant price upside over the next three to six months”. The benchmark EU carbon price, the December 2010 EUA futures contract, closed at €13.45 on Monday January 25, one euro up on its level immediately after the Copenhagen conference.

Meanwhile, the chances of a US climate bill being passed in 2010 and providing a massive stimulus to global carbon-market demand are fading. Passage of a cap and trade bill in the Senate has struck further political hurdles as things turn against the Obama administration. Cap and trade legislation is similarly stalemated in Australia with few options open to the Rudd government to pass its Carbon Pollution Reduction Scheme bill, or something similar, short of an election.

As a result, “a string of bearish signals is currently hanging over the European and global carbon markets like a big, dark cloud,” Merrill’s concludes. A knock-on effect will be lower demand worldwide for UN-based carbon offset credits, CERs. The Dec 2010 CER contract closed at €11.80 in Europe on Monday.