Isramart: EU carbon prices lift to 7-month high

Isramart news:
The EU carbon market has hit seven-month highs in April on the back of higher energy prices and expectations of tighter demand for EUA permits in future years. The benchmark carbon price, over the futures contract for December 2010 delivery, closed at €15.10 on April 27 on the European Climate Exchange after topping €15.60 the day before.

Higher gas and oil prices have driven the carbon market higher along with tightening demand by power sector compliance buyers looking ahead to future years. The combination has seen EUA prices break out of the €12 to €14 range in which they had been stuck since December, amid subdued market conditions following the disappointments of the Copenhagen climate conference.

Carbon prices follow oil and gas prices higher because power utilities react by switching to dirtier-burning coal, thus increasing the emissions footprint of their power production and demand for emissions permits to match.

But demand among EU power companies also appears to be rising amid expectations that supply of permits will tighten in future years. EUAs on issue in the current market phase until 2012 can be banked for use in the next phase from 2013 to 2020. It appears compliance buyers are increasing purchases at current low prices, or hanging onto existing holdings, for this purpose.

Fewer permits are now expected to be put up for auction in future by authorities than first expected to help wind back a surplus that has emerged during the global recession. Added to that is anticipation in the market that the EU may move tighten its 2020 emissions reduction target from 20 per cent below 1990 levels to as high as 30 per cent. Bloomberg reports EU Climate Commissioner Connie Hedegaard saying that a report expected in June will probably conclude that the tightening is affordable.

The equivalent benchmark CER futures price tracked EUAs up and closed at €13.60 on April 27. However, later dated futures prices continue to lag on a backward forward price curve due to doubts over the delivery of the Kyoto credits closer to 2012 and the future of the UN CDM thereafter.