Recession could push carbon price down to €15 a tonne

The price of EU Allowances (EUAs) in Europe's emissions trading scheme (ETS) may have hit an 18 month low last week, but it has not bottomed out yet, according to the latest predictions from research firm IDEAcarbon.

The company today released its weekly report on the carbon market, claiming that reduced production among heavy industries and lower oil prices meant the short- to medium-term price floor for EUAs had fallen to just €15 (£12) a tonne.

"Taking the EU ETS in isolation, the price implications of the recession are already being seen," the report claims. "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."

The report added that the shortfall of EUAs over the course of the current phase of the ETS – which emitters have to make up by buying in UN-backed credits from outside the EU such as Certified Emission Reductions (CERs) – will also fall 44 per cent against previous projections to an average of 115 million tonnes a year.

Alessandro Vitelli, director of strategy and intelligence at IDEAcarbon said reduced demand for carbon credits was likely to continue until 2009. "Our latest forecasts suggest EU industrial output will grow at just one per cent in 2008, and shrink by 0.7 per cent in 2009," he said. "This will reduce the level of emissions from industry across Europe, and therefore cause a drop in the shortfall of credits available."

However, he predicted that from 2009 onwards, the outlook for the market remained bullish and insisted there was little chance that the price of carbon would collapse in the same way it did during the first phase of the ETS when the supply of EUAs far exceeded demand.

"There is still going to be a shortfall of EUAs of 115 million tonnes a year and it would take a cataclysmic fall in industrial output to stop the market being short," he said. "And if we did get to a point where the credibility of the scheme was being questioned, governments would have the capacity to push the price back up by releasing fewer EUAs for auction."

He added that in the longer term, the outlook for the market remained healthy. "In the short term the market is reacting to economic fundamentals, but in the long term people are looking out to the EU's 2020 emissions targets and know that a higher price of carbon will be needed to help meet those targets," he said.