Sell-off forces EU carbon to record lows

The price of carbon credits in the EU's emissions trading scheme reached a record low for the current phase of the scheme of just €11.60 as many of the large scale emitters covered by the scheme continued to offload their EUA carbon credits.

The price of EUAs has been on a steady slide since the start of the year when they stood just shy of €16 a tonne and market watchers are concerned that the price of carbon is no longer tracking oil prices.

Rising oil prices typically lead to an increase in the price of carbon, as they tend to result in energy producers switching from gas to more carbon intensive coal – a scenario that leads to increased demand for carbon credits.

However, the price of carbon has failed to track recent fluctuations in the oil price, prompting fears that any increase in demand for credits from energy companies arising from changes in the oil price is being outweighed by the on-going sell off of credits amongst heavy industries fearful that the recession will lead to reduced production levels.

"The carbon and oil price has become to some extent detached, just because of the sheer scale of the selling pressure," said Henrik Hasselknippe, head of carbon analysis at research firm Point Carbon. "Companies used to sell off credits if they saw that production levels had been down in the previous quarter, but now they are selling based on predictions that production levels will be down for the coming quarters."

He added that there were also early signs that the low price of EUAs was impacting investment in the UN-backed Clean Development Mechanism offsetting scheme.

"If you want to buy CDM credits [CERs] from a good emission reduction project in China it can now cost more than EUAs," he explained. "As a result we are already seeing reduced demands for CERs and are hearing rumours of people renegotiating prices with CDM projects."

The bearish market will undermine recent predictions that the outlook for the carbon market during 2009 remains largely positive.

However, Hasselknippe insisted that the long term outlook for the market remaioned good and predicted that prices of both EUAs and CERs could recover very rapidly once production levels amongst heavy industries begin to rise again.

"If we see people begin to hold off of CDM projects then once production levels rise the increase in demand for credits will be far quicker than the rise in the supply of credits, as you can't just turn these projects on and off overnight" he explained. "Prices could well triple by the end of the 2008 to 2012 [ETS] period."

The net result is that with the supply of CERs likely to remain constrained and carbon caps within the ETS to be lowered from 2013 there are opportunities for investors to buy credits at the currently low price and make good returns over the next two to five years.

However, Hasselknippe said that while all traders were aware that the three to five year outlook for the market remained bullish there were relatively few with the "deep pockets" necessary to make long term bets.