EU Carbon Falls a Second Week Amid Supply Adjustment Uncertainty

Jan 10, 2014 12:50 pm ET

Jan. 10 (Bloomberg) -- European Union carbon permits fell for a second week amid uncertainty over how many allowances the bloc will withhold this year as part of its strategy to reduce a surplus that drove prices to a record low.

Allowances for December declined to the lowest level in more than a month today, before closing up 0.4 percent at 4.60 euros ($6.28) a metric ton on ICE Futures Europe in London. The most-traded options in the past five days were contracts to sell December 2014 futures at 3.50 euros a ton, ICE data show.

The European Commission is seeking to shorten the time lawmakers and governments spend on their final scrutiny of a draft regulation approved by member states to delay the sale of as much as 400 million permits this year. The amount to be postponed, or backloaded, will be determined after the scrutiny period when the EU can amend its auction calendar.

“The market isn’t sure that approval for the backloading timetable will be given early enough to allow 400 million tons to be withheld in 2014, it might only be 300 million this year,” Krzysztof Piatek, a trader at Vertis Environmental Finance in Budapest, said today by e-mail. “This seems to be on everyone’s mind at the moment.”

If backloading starts before April, the sale of 400 million permits will be postponed. That drops to 300 million if it begins in the second quarter, the commission said Jan. 8.

December carbon fell 4.4 percent this week, matching the decline in the previous period. The benchmark contract climbed to as high as 4.84 euros on Jan. 8 when the bloc’s Climate Change Committee approved the backloading plan.

Prices may drop further if chart support at 4.47 euros is breached, according to Clive Lambert, a technical analyst at FuturesTechs in Leigh-on-Sea, England.

Surplus Permits

The benchmark contract in Europe’s $52 billion emissions market fell 68 percent in the past three years as contracting economies curbed demand for permits, exacerbating a surplus that pushed carbon prices to as low as 2.46 euros a ton in April. Under backloading, the EU will delay the sale of 900 million permits in 2014-16 and return them to the market at the end of the decade.

The EU’s emissions-trading system hands out for free or auctions permits to polluters, which must surrender enough to match their carbon output or pay fines.

Trading in December 3.50 euro put options jumped to a weekly record of 6.9 million tons, ICE data show. The most- traded call options were those to buy December carbon at 7 euros a ton, with a weekly record of 5.5 million tons.

Call options are the right, without the obligation, to buy assets at a set date and price. Put options are the right to sell.

--Editors: Andrew Reierson, James Herron