Global Recession Reaches Carbon Market

The global economic recession will have a significant effect on the European carbon market, nearly halving the shortfall in EU Allowances (EUAs), according to a new report.

In December 2007, carbon market analysis and research firm IDEAcarbon estimated the Phase II shortfall in EUAs would be 206 million tons per year of carbon dioxide (CO2) equivalent. However, the onset of recession has cut this forecasted shortfall by 44% to 115 million tons per year between 2008 and 2012, according to projections in the latest weekly report from IDEAcarbon.

"Our latest forecasts suggest EU industrial output will grow at just 1% in 2008, and shrink by 0.7% in 2009," Alessandro Vitelli, Director of Strategy and Intelligence at IDEAcarbon said, "This will reduce the level of emissions from industry across Europe, and therefore cause a drop in the shortfall of credits available. After 2009 we predict output growth will revert to a positive trend."

IDEAcarbon estimates that in 2008, total emissions from the EU Emissions Trading Scheme (ETS) will come in at around 2.18 billion tons, some 98 million tons above the cap. In 2009 that shortfall is expected to shrink to 83 million tons. Over the five years of EU ETS Phase II, the average annual shortfall will be 115 million tons.

"Taking the EU ETS in isolation, the price implications of the recession are already being seen," the report says. "Industrial companies are busy selling off any surplus EUAs in order to raise short-term cash. EUA prices have fallen from their July 1 peak of €29.33 to a low on October 28 of €17.40. These surplus EUAs are being snapped up by European utilities, which face a far greater shortfall of allowances than their industrial counterparts."

IDEAcarbon sees a short- to medium-term price floor of around €15.00 for the front-year EUA contract; this represents an extrapolation of the recent movement in crude oil prices together with a continuing flow of surplus EUAs into the market.

The outlook for Certified Emission Reduction demand is not completely clear, IDEAcarbon said. While the shortfall in the EU ETS will be less than expected, there will still be demand from industrial installations for Kyoto offsets to meet the shortfall in their EU ETS allowance allocations, as well as from Kyoto Protocol Annex 1 governments (EU, Japan, Australia, New Zealand) to meet their own emissions reduction goals. The onset of recession means however that Annex 1 governments may commit fewer resources to purchasing offsets.

On the supply side, a recession is unlikely to hamper the development of most existing Clean Development Mechanism (CDM) projects but IDEAcarbon believes that sales of CERs may be held back by developers until prices are back up at high levels. This itself will reduce the supply of CERs and could help stabilise prices at around a €1.00- 2.00 discount to EUA prices.

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