LONDON: European emissions prices are expected to remain low next year as fresh supply of permits will outweigh an uptick in demand from increased utility hedging and the entry of thousands of airlines into the EU's carbon market on January 1.
EU Allowance (EUA) prices are hovering near record lows of 7.30 euros after halving in value this year, mainly due to a slump in demand after the worst recession in almost a century crushed the European manufacturing sector.
"The decisive price factor in the first half of 2012 will be the euro crisis and the resulting economic outlook," said analysts at Germany-based UniCredit Bank AG last week.
"A second and perhaps prolonged recession in Europe could have a similar impact on power consumption along with a related drop in demand for carbon permits," added brokers Jeffries Bache, writing in an emailed note on Friday.
The early sale of about 420 million 2013-vintage EUAs by both the EU Commission and the European Investment Bank, coupled with some 250 million phase two permits from member states, will offset the expected increase in demand from airlines and power generators.
Supply of EUAs could be augmented by the issuance of around 320 million Certified Emissions Reductions (CERs) and another 200 million Emission Reduction Units (ERUs), two types of UN credits that European companies can use to meet carbon targets.
As a result, analysts polled this week forecast front-year EUAs to average just under 10 euros next year, a far cry from both the 20 euro prediction for 2011 they made late last year and the mean EUA price of 15.86 euros seen in the first four years of the scheme's current trading phase (2008-2012).
The analysts do not see EUA prices averaging above 15 euros until at least 2016, the survey showed.
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