From: Reuters
Published January 23, 2008 02:05 PM

Emissions traders bullish over EU climate proposal

By Michael Szabo

LONDON (Reuters) - A series of energy and climate proposals announced by the European Union on Wednesday, including an overhaul of its flagship Emissions Trading Scheme, should push carbon prices higher in the long-term, traders said.

The European Union's executive favors major changes in the third phase of its Emissions Trading Scheme (2013-2020), including cutting the total amount of pollution permits by a fifth by 2020 and auctioning them to member states rather than distributing them for free, it said.

The ETS, now in its second phase running from 2008-2012, allocates a fixed quota of carbon credits, each allowing the bearer to pollute the equivalent of one metric ton of carbon dioxide. Member states are then free to trade credits among themselves.

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EUAs, the carbon credits traded under the ETS, lost ground on Wednesday, as December 2008 futures on the European Climate Exchange closed 61 cents or 3 percent lower at 19.70 euros a metric ton.

The benchmark futures have lost almost 12 percent since Friday's close, though many attribute it to weakness in energy prices and uncertainty in the global economy.

Emissions traders said although Wednesday's proposals are generally bullish, most of them had been previously leaked and therefore the news was already priced into the market.

"The announcement concerns something that is quite far away... but it's bullish for EUAs," Societe Generale's Emmanuel Fages told Reuters.

The European Commission has aligned the EU-wide target for phase 3 of the ETS with the its pledge to reduce European emissions by 20 percent below 1990 levels by 2020.

In an investment note published by Societe Generale late Wednesday, Fages said EUA prices in phase 3 could exceed 35 euros a metric ton.

"The EU cap seems lower than what was forecast, giving the market an average of 1.85 billion EUAs to play with," a London-based emissions trader said, referring to the estimated number of permits to be issued annually by the EU between 2013 and 2020.

If a global successor agreement to the United Nations' Kyoto Protocol is in place by 2012, the EU has said it will up its target to 30 percent reductions by 2020, thus further reducing the total amount of credits in the market.

"If the EU goes with 30 percent, installations will have to make up the difference through abatement or by buying EUAs or CERs," the London trader said.

KYOTO CREDITS

Certified Emissions Reductions, credits issued by the UN to developing countries under its Clean Development Mechanism, can be bought and imported by companies in rich nations to help meet targets under the Kyoto Protocol.

"The EU proposals are even more bullish for EUAs if European imports of CERs are restricted, which seems to be the present stance of the Commission," Fages said.

An internal note from EU Environment Commissioner Stavros Dimas obtained by Reuters on Tuesday said the EU should restrict the availability of UN credits to an average of 1.4 billion in phase 3, or around 10 percent of EUAs.

"This is bearish news for CERs as the Commission is essentially conditioning CER imports to an international agreement... basically telling the UN that they're ready to participate in the CDM if there is a successor agreement in place and there is CER demand beyond Europe" Fages said.

The Reuters Dec08 CER Index closed down 26 cents at 15.51 a metric ton on Wednesday, a discount to the EUAs of around four euros.

CLOSED MARKET

"The EU wants to operate a closed market, restricting external supply and demand that could adversely affect the European carbon price," Fages said.

EU carbon prices crashed in phase 1 (2005-2007) as the result of an over allocation in permits by the Commission.

"The environmental benefit of the first phase may be limited," the EC said in a statement on Wednesday.

Although traders are optimistic about what the EU's proposals mean to EUA prices, no one is rushing out to buy credits just yet.

"With concerns over the global economy and weak energy and commodity prices, carbon's not ready for a big bull run at the moment," the London trader added.

For additional analysis on the carbon markets, log on to http://www.reutersinteractive.com

(Additional reporting by Gerard Wynn; Editing by James Jukwey)

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