The EU carbon
market has nosedived as the trade in emissions permits and offsets catches the
contagion that has spread across global financial markets in recent
days.
The prices of
EUAs
and
CERs have
fallen sharply as fears of a worldwide economic slump take hold. The pivotal US
economy now appears on the brink of recession as the fallout from the sub-prime
mortgage lending collapse shakes confidence among market professionals and
private investors.
The carbon market began to follow share and finance
markets down last week (Jan 14-18), but modest falls had turned into a rout by
this week. By the close of a very volatile day on Tuesday January 22, the price
of the benchmark Dec 08 EUA contract had fallen 13 per cent on the European
Climate Exchange since the start of the previous week.
Dec 08s closed at
€20.31 having recovered some heavy falls earlier in the day, but was down €3.10
over the week. Longer dated futures and forward contracts suffered similar
falls, Dec 09s closing at €20.78, Dec 10s at €21.32 and Dec 12s at €22.88.
The mood was reflected on Europe’s growing secondary CER market where
issued CERs for forward delivery also fell 11 per cent. Dec 08 CERs have fallen
€1.95 over a week to close at €15.45 on the Nord Pool Exchange on Tuesday. In
the US market, CERs on the Chicago Climate Exchange fell $2.19on Tuesday to
$22.76 (€15.55).
The downturn brings and end to period of relative
buoyancy in the market toward the end of 2007 and in the New Year as a rising
oil price and confidence in Phase II of the
EU ETS
grew. The past week’s falls have seen prices slump to their lowest levels in
over four months.
A global downturn in economic activity would cause a
reduction in greenhouse gas emissions and lower demand for emission permits in
Europe. While this is the fundamental link between carbon markets to the economy
and other financial markets, the price falls have been driven more by general
sentiments of nervousness and uncertainty that has driven all markets down
around the world.
While the industrialised world now faces a period of
slower growth, it may well be that the sharp market sell-off has been overdone.
Decisive action by the US Federal Reserve to cut interest rates on Tuesday,
along with a White House fiscal stimulus package should restore some confidence
to markets now and underpin growth over coming months. With further rate cuts
fully expected, it is currently more likely than not that any US recession is
mild and relatively short-lived.
However, all financial markets, carbon
included, can expect the volatile ride to continue for now with further losses
and temporary upswings possible. The primary market for CERs yet to be issued
won’t see the same volatility. But participants can expect to see some lowering
of prices in emission reduction purchase agreements (ERPAs) at the higher end in
CDM
project host countries like India. Prices in China may not be affected. The size
of any price falls, however, will likely depend on how deep the downturn turns
out to be worldwide and how long it continues.
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