EU CO2 Price Forecast To Rise 7.5% In 2008

European Union Emissions Trading Scheme carbon prices are expected to rise to EUR23.33 a metric ton next year due to participants holding back from making full use of Certified Emissions Reductions, and utility buying, according to a Dow Jones Newswire poll published Wednesday.

The poll of 14 analysts, trader and brokers forecasts an average price for carbon in 2008 of EUR23.33/ton, compared to current over-the-counter levels of EUR21.70/ton. The forecast is 1% higher than a similar prediction made in a Dow Jones Newswire poll in July and 7.5% up on current prices. The range of forecasts in this latest poll for the benchmark December 2008 contract is from EUR19/ton to EUR26.90/ton. Under the E.U. ETS system, E.U. member state governments and the European Commission set limits to the amount of carbon dioxide industry can emit. Companies that stay below these CO2 limits can sell their surplus, in the form of credits worth one metric ton of carbon, to companies that have overshot their quotas. This creates a financial incentive to cut carbon emissions, blamed for causing climate change. Utilities are the companies that are set the strictest limits under the scheme, as according to the commission they can easily pass on their additional costs to consumers. The expectation that participants will not make full use of the CER mechanism and heavy buying from utilities, were cited by participants in the poll as the main reasons for the expected rise. "CER imports will not yet be maximized due to the market education process," Emmanuel Fages, carbon analyst at investment bank Societe Generale told Dow Jones. CERs are carbon credits generated by emissions-cutting projects like wind farms in developing countries. The U.N. approves these projects and then issues the project owners with CERs, which can be used for compliance by countries under the Kyoto Protocol and the E.U. ETS. Because they are linked to projects which may experience trouble meeting their output goals, and because of lower construction costs in the developing world CERs are cheaper than carbon prices under the E.U. ETS. Consequently if a large number of CERs was to enter the market the price of carbon in the E.U. ETS would likely drop. Kris Voorspools, an analyst at investment bank Fortis, said: "In the beginning of Phase Two (of the E.U. ETS which runs 2008-2012), utilities will be more active than industrial players who prefer not to act before they have sufficient verified emission data. As utilities are short, the price in the beginning of Phase Two should be above the theoretical equilibrium." A London-based trader who asked not to be named said that the possibility of banking 2008-2012 allowances for use after 2012 could also help boost price levels. "There's the potential to bank into Phase Three (post 2012) as well as the potential for higher auctioning (and therefore higher carbon prices) in the third phase," he said. The World Bank estimates that the E.U. ETS was worth nearly $25 billion in 2006.