Isra-Mart srl: EU Carbon Prices Likely To Stay Subdued - Analysts

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Prices on the European carbon market are likely to remain subdued, in spite of a slight pickup this week analysts have said, after events as diverse as the Greek financial crisis and a push for more energy savings in Europe triggered a double-digit drop last week.

The fall in prices can undermine the effectiveness of the Emissions Trading System in delivering on its ultimate objective of encouraging investment in green technologies, because lower prices make it less attractive for companies to invest in long-term plans instead of buying allowances to cover their present emissions.

The price of December 2011 futures on the allowances to emit carbon dioxide fell more than 20% last week. The prices have slightly recovered this week, but are still much lower than earlier in the month, at around EUR13.46 per allowance, which gives the holder the right to emit one metric ton of CO2.

The prices had risen over EUR17 between March and May, as worries about the future of nuclear energy in Europe had prompted traders to bet on an increased use of more CO2-emitting fuels. The U.K. government set in March a price floor for tradable carbon emissions credits at GBP16 a metric ton in 2013 rising to a targeted GBP30/ton in 2020.

"In the short term there is little or no incentive for buyers to step in, and (...) there is therefore now a clear risk of prices falling further still over the coming days and weeks," said Deutsch Bank analysts Mark Lewis and Isabelle Curien in a note last Friday. They point to the latest twist in the Greek financial crisis as the main element behind the recent selloff and the current uncertainty.

But other factors are also seen as likely causes for last week's plunge.

A new European Commission proposal to increase energy efficiency in the EU presented last week was the determining factor, according to Emmanuel Fages, head of power, gas, carbon and coal research at Societe Generale Commodities in Paris. Experts, and the commission's climate department itself, consider that more energy savings might negatively affect CO2 prices because they would lead to lower emissions. The commission added a last-minute a clause which allows it to monitor the situation and take the initiative if that happens, but that hasn't eased worries.

Others, including the Deutsche Bank analysts, see the Greek crisis prompting operators to bet on another economic downturn. There is a fear in the market that "the Eurozone and broader EU economy might now be on the verge of another severe slowdown, and fear that under such a scenario the commission would not be able to take the necessary measures to re-establish price tension," said Deutsche Bank analysts.

The EU could decide to take a certain amount of allowances out of the market to push prices up, but that would be even more complicated politically in case of an economic downturn.