BarCap ups outlook for EU carbon prices

Despite a sluggish start to the year that this week saw the price of EU carbon emission permits hit a nine-month low, Barclays Capital (BarCap) yesterday predicted that the market will enjoy a modest recovery during 2010.

Trevor Sikorski, director of carbon markets research at BarCap, issued a research note predicting that the price of EU allowances (EUAs) will rise by about 10 per cent to an average of €14 (£12.50) a tonne during 2010.

He also raised his price target for the first quarter of the year by 50 cents to €12 a tonne.

The spot price for EUAs currently stands at about €12.50 and analysts have been predicting that it could slip further ahead of the release of EU emissions data in April.

However, Sikorski said that the price of carbon was then likely to rebound to about €15 a tonne during the second half of the year as companies begin to hedge their position in anticipation of the tighter emission caps that will be imposed from 2013.

Businesses operating in the ETS are permitted to hold on to emission permits issued during the current phase two of the scheme and use them during phase three, which runs from 2013 to 2020. As a result, growing numbers of industrial firms are expected to hold on to their EUAs to help them cope with the shortfall in permits that will be imposed during phase three.

Sikorski predicted that this hedging will result in EUA prices averaging €18 in 2011 and €24 in 2012. He said that the impact of the recession on industrial output meant that overall, 224 million EUAs from phase two would be "banked" for use in phase three.

However, he added that despite this surplus, the average price during phase three is likely to rise to €40 a tonne as the scheme's cap is steadily lowered to result in an overall cut in industrial emissions of 21 per cent on 1990 levels by 2020.

The research note also predicted that the price of UN-backed Certified Emission Reduction carbon offset credits will track the rising price of EUAs, averaging €11.50 during the first half of the year before rising to €13 in the second half.