Carbon surges on EU oversupply measures

Carbon prices jumped to their biggest one-day gain after a European Parliament committee approved measures to address the oversupply that caused the market to plunge over the past year.

Benchmark carbon prices traded in the European Union’s six-year-old emissions trading system, the world’s biggest carbon market, surged by as much as 32 per cent in early trading on Tuesday.

By late afternoon, the ICE December 2012 European Union Allowance contract was up 21.8 per cent at €8.99.

The spike came after the parliament’s environment committee voted to call on the European Commission to withhold a “significant” amount of the allowances traded in the EU market, known as European Union Allowances, or EUAs, from 2013.

That move, if passed into law, would address fears of a long-term oversupply of allowances that, along with the effects of the eurozone crisis, has seen carbon prices tumble to record lows this year.

But analysts cautioned that the move required several more stages of approval and it was far from certain any reduction in allowances would be passed into law, especially given the expected opposition from heavy coal-using countries such as Poland that prefer lower carbon prices.

“In our view, the probability of this is almost zero,” said Per Lekander of UBS, the Swiss bank that sent a shiver through the market last month when it predicted an oversupply lasting until 2025.

EUAs prices fell to an all-time low of €6.30 last week and are still down 38.5 per cent since January.

Trevor Sikorski, of Barclays Capital, said that, while the committee vote was welcome news in a troubled market, there were still a number of “very serious obstacles to be crossed” before the measures could reach the stage of a final bill.

“We would caution against over-optimism but this does feel like a seasonal treat from the EU to those in the carbon market,” he said.

The rally in carbon prices was exacerbated by some speculators covering their bearish bets – or short positions – in thin trading the week before Christmas.

Speculators have been betting that carbon prices will fall further because the European Commission has overestimated the number of credits that heavy polluters need to cover their emissions, triggering a long-term oversupply.

In addition, traders are wagering that the eurozone crisis will weaken demand for credits among the heavy industries that need to buy them.

Nearly 11,000 plants are subject to the EU emissions trading scheme, ranging from steel and cement factories to power stations.

From January, the scheme is to cover airlines for the first time in a contentious move that has prompted widespread criticism from dozens of countries, including the US and China.

Additional reporting by Javier Blas in London