EU carbon market rally to prove short-lived

The recent rally in the price of EU carbon allowances (EUAs) is likely to end within the next couple of months as prices fall back to around €12 (£10.6) a tonne, according to analyst firm Point Carbon.

The price of carbon allowances within the EU emissions trading scheme (ETS) currently stands at over €14.70, and has been steadily climbing since February when it hit a record low of around €8 a tonne.

But recent Point Carbon research says the recovery is likely to be short-lived and prices are predicted to fall back to around €12 a tonne within the next couple of months.

"The market is long for the current phase and we expect prices to fall back again," Point Carbon's Karl-Magnus Maribu told BusinessGreen.com. "The recent rally has been largely driven by more utilities hedging… but we expect prices to fall in the next couple of months when that stops and industries look at their books and realise they have a surplus of allowances."

Maribu added that a more robust rally in prices would be unlikely without signs of economic recovery. "Manufacturing has basically stopped, steel and cement production are well down, and we are beginning to see a fall in electricity consumption," he said. "All of this will have an effect on demand for emissions allowances."

However, he said that prices were unlikely to fall to sub-€10 levels and predicted that prices would improve from next year as the next phase of the scheme came in sight.

According to Point Carbon's latest predictions, average prices for EUAs will reach €18 a tonne next year, before rising to €22 a tonne in 2011 and €26 a tonne in 2012.

"Phase 2 will be long, but the combination of an economic recovery and the tighter caps that will take effect from 2013 will mean prices will rise in the long term," said Maribu, explaining that companies are likely to buy in extra credits during the current phase and hold on to them for use in the post-2013 phase of the market.

In related news, Deutsche Bank became the latest investment firm to downgrade its emission projections for this year, predicting that sectors covered by the ETS will emit 50 million fewer tonnes of CO2 than previously expected this year. The move follows a similar report from Barclays Capital, which also predicted that the market will face an oversupply of credits.