European carbon market rattled as prices dive

LONDON, April 27 (Reuters) - European carbon prices continued a collapse on Thursday that has wiped up to 50 percent off the value of carbon credits over the past week, testing the implementation of the EU's Kyoto strategy.

The price slide was poised to continue, traders said, depending on the release of key 2005 emissions data over the next 2 weeks, potentially leaving the market in the doldrums until its second phase from 2008.

The scheme embraces a large chunk of the bloc's international Kyoto commitment to tackle climate change.

A clutch of countries reported this week that their 2005 carbon dioxide (CO2) emissions were far below expectation, crashing demand for permits to pollute and so taking the floor from underneath the EU's carbon credit market.

The degree of surprise at the news partly reflected the immaturity of the market, which was launched January 2005, traders said.

Now key outstanding countries yet to report -- Britain, Germany, Italy, Poland and Portugal -- must between them announce by May 15 that they are some 36 million tonnes short of carbon credits to avoid a complete price collapse, traders said.

"It's precariously balanced," said Louis Redshaw, Head of Environmental Markets at Barclays Capital. "It feels very edgy round here."

"Unless that 40 million tonnes gets wiped out pretty quickly this commodity could be worthless," said a second trader.

Carbon credits for December 2006 delivery fell below 14 euros ($17.40) on the European Climate Exchange -- less than half a high of 31 euros last week. Prices recovered to 16.70 euros by the market close.

"From a market perspective it's terrible news," said James Emanuel, Head of Carbon Trading at brokers CO2e.com.

"If there's a (net carbon credit) surplus there's no incentive to reduce emissions and the (carbon) price collapses. It won't go to zero, it would effectively go down to the administrative cost of the scheme... it could be 1 euro, who knows?"

POWER, UTILITY JITTERS

The EU scheme sets a cap on total emissions by smokestack industries -- such as power generating companies -- of heat-trapping CO2 and requires firms to have a carbon credit for every tonne of emissions.

If emissions are below the cap, companies can sell their surplus carbon credits, dampening demand, and low 2005 emissions data published by the Czech Republic and the Netherlands, and strong hints of the same from France on Thursday, this week helped crash the market.

Utilities are particularly exposed to the drop, both because of a fall in power prices and because some have on their balance sheets millions of tonnes of carbon credits, whose value has dived.

Morgan Stanley said on Thursday the utility stocks expected to come under most pressure from the carbon price collapse were nuclear power firms British Energy and Electricite de France, which have no exposure to carbon but high exposure to falling power prices.

At the market close British Energy was down 3.6 percent, with Germany's E.ON down 1.1 percent and French utility EDF down 4.2 percent.

SECOND PHASE

Under the scheme, countries were supposed to give their affected industry slightly fewer permits to pollute, or carbon credits, than expected emissions, to force them to clean up.

The 2005 emissions undershoot has left traders pointing the finger at companies and countries for inflating those figures, to minimise any financial impact of the scheme.

States may now find themselves under pressure to tighten significantly their credit allocations under the second phase of the scheme, from 2008 to 2012, which they should submit to the European Commission by June 30.

"The (2005) data will inform the allocation for the caps in the second phase," said Barbara Helfferich, spokesman for Environment Commissioner Stavros Dimas, on Thursday.

"This does potentially strengthen the political hand of the European Commission in relation to phase two National Allocation Plans," said Anthony Hobley, general counsel to the Climate Change Capital fund, which has over $100 million invested in carbon markets. -- (Additional reporting by Stuart Penson in London, Jeff Mason in Brussels and Marguerita Choy in Paris)


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