Exclusive: EU firms selling carbon credits to survive

Companies in the European emissions trading scheme (ETS) are rumoured to be desperately attempting to raise cash by selling off the bulk of their emissions allowances (EUAs), despite the fact that they will have to buy them back, probably at a higher price, to avoid breaching their emissions cap.

Industry insiders are convinced this 'over-selling' of credits is at least partly to blame for the recent slump in EUA prices, which has seen the price drop from over €12 to a record low of around €8 over the last 30 days.

Many heavy emitters covered by the scheme have been selling surplus credits for some months amidst concerns that a drop in industrial output and subsequent fall in emissions would leave them with credits they no longer needed.

However, market watchers are now convinced that some cash-strapped firms have gone beyond offloading surplus EUAs and are now selling credits that will be needed to cover their emissions at some point in the future.

"It's anecdotal at the moment, but there is some evidence that companies are selling more than their surplus EUAs and are effectively robbing Peter to pay Paul," said Alessandro Vitelli of analyst firm IDEAcarbon.

Under the terms of the ETS, EUAs for 2009 have to be issued to emitters by the end of this month, but the EUAs that are supposed to be surrendered to the authorities to cover emissions during 2008 do not have to be handed over until the end of April. As a result firms hold two years of allowances throughout March and April - a scenario that could tempt some cash-strapped firms to sell all their 2008 allowances and then surrender their 2009 EUAs to comply with the cap.

"There appear to be some firms saying 'let's just worry about getting through this year'," said Vitelli. "They are simply focused on survival and will worry about buying back the credits they need from the market at a later date."

David Hone, climate change advisor at oil giant Shell, said he had also seen evidence of firms generating short-term cash flow by selling credits they will later have to buy back, potentially at a significantly higher price. "People are selling more than their cap, knowing they will have to buy [EUAs] back," he said. "They are taking a view that they need the cash to survive."

A recent increase in EUA trading on the BlueNext exchange, which has seen 422 million tonnes – some 20 per cent – of all EUAs in circulation sold since 16 October, appears to back up suggestions that some firms are going beyond simply selling surplus credits.

"Either everyone in the market is very long and selling their surplus credits, the exchange has seen a sizable increase in day traders, or some firms are selling more than their surplus EUAs," said Vitelli. "My bet is it's a combination of latter two options."

Market watchers are agreed that the overselling of EUAs is an entirely rational decision for firms in a precarious cash position, but they are warning it could result in a rapid spike in the price of EUAs in 2012, when those companies that have sold EUAs they will ultimately have to surrender turn to the market to buy the EUAs they need to balance the books.

"The more this goes on and companies borrow EUAs from the next year to cover the previous year's emissions, the greater the risk of a train wreck come 2012, " predicted Vitelli. "We could go from one extreme to another, with a lot of people bidding up the price of credits."