Price of EU carbon credits to hit €45

Carbon credits in both the European Union's emissions trading scheme (ETS) and the UN's Clean Development Mechanism (CDM) offsetting programme are badly undervalued and due to increase in price before the end of the year.

That is the conclusion of a major new report from analyst IDEAcarbon, which claims that demand for credits from European businesses is set to rise, forcing up the price.

The price of European Union Allowances (EUAs) has fallen sharply in the past month as oil prices have stabilised, dropping from a high of €29.33 (£23.37) at the start of July to a low on 4 August of €21.21 (£16.90). But according to IDEAcarbon, this low price is now at odds with the fundamental drivers in the market and the price should soon climb again.

"The fall in price is out of kilter with the basic supply and demand," explained a spokesman for the company. "The supply of EUAs and CERs [from the CDM] is basically the same as it was and the demand for credits from governments is the same, but the business demand has increased."

The spike in demand from businesses operating within the EU ETS is the result of proposed changes to the scheme that would stop credits issued during the second phase of the scheme, that runs up to 2012, being carried over into phase III.

"The demand is definitely higher and we would expect that to take effect on the price of credits before the end of the year," added the spokesman.

IDEAcarbon predicted that the new supply and demand conditions could see the price of credits roughly double to €45 (£36) per tonne, implying an average price for the whole of phase II of €29 (£23) for EUAs and €24 (£19) for CERs.

The increased price is likely to further increase financial pressure on energy firms and other heavy polluters to curb emissions. Drax, the operator of the UK's largest coal-fired power station, last week admitted that the cost of credits had contributed to a fall in profits and outlined plans to cut emissions through greater use of biomass.