EU carbon investors look to signs of recovery amid slowdown

The European carbon market seems to be pinning its hopes on economic recovery even as outlook continues to be weak. Prices of permits under the European Union's Union's Emissions Trading Scheme have doubled since hitting a low of €8 in February reaching a high of €16 this week. Prices eased to €15 on Wedneday.

European Central Bank president Jean-Claude Trichet said that economic growth in Europe was on the verge of picking up with some countries already reporting a rise in gross domestic product.

According to analysts the carbon market reflected a rising trend on oil and equity gains over the past month on signs of improving global economy, however underlying factors affecting the demand and supply balance still remained depressed.

A world economic recovery would imply greater energy consumption and industrial output and therefore increased greenhouse gas emissions and more demand for carbon permits such as EUAs.

However, analysts seem to be at a loss to explain the recent rally in EUAs. They point out that EUA price levels like that of oil still remain disconnected from fundamentals.

US crude oil futures reached a 6-month high of $60.08 a barrel on Tuesday with traders focused on economic recovery rather than inventory levels that are historically high.

Analysts are expecting a market surplus in EUAs in 2009 and 2010 as the European industrial production hit by the global downturn slows down prompting a reassessment of EUA demand.

A surplus in the scheme's first phase (2005-2007) triggered a crash in EUA prices to zero.

Meanwhile, following opposition to its emissions trading scheme from industry, the Australian government has deferred the scheme till July 2011. Industry had pointed to the burden it would impose in recession.

Also opposition and minor parties remain unconvinced and have refused to support the revised legislation.

The government is expected to introduce the laws in the Lower House and the scheme is expected to be through Parliament by the end of June.

However, Greens Senator Christine Milne is not hopeful of the legislation being passed in its present form.

She said that her party would call for tougher emission reduction targets and oppose the scheme.

She said that the government was pushing on in the full knowledge that it had absolutely no friends on the legislation and that nobody had undertaken to pass it because it was not environmentally effective or economically efficient.

Earlier this month, the government cut the price of carbon from $40 to $10 for the first year of the scheme.

The government hiked the range of its emissions reduction target to up to 25 per cent of 2000 levels by 2020.

The scheme was originally due to start next year, but prime minister Kevin Rudd said that changes were necessary because of the worsening global economic conditions.

The scheme in its present form is also opposed by the Liberals.