European Union carbon permits erased early gains as natural-gas prices slumped, damping demand for emission allowances and undermining optimism that followed an agreement reached at the global climate summit in Mexico.
EU allowances for December 2011 dropped 0.3 percent to 14.85 euros ($19.88) a ton on London’s ICE Futures Europe exchange. They earlier rose as much as 1.8 percent, the biggest intraday increase since Nov. 17, after envoys at the United Nations’ meeting in Cancun reached agreements on reducing deforestation and a fund to manage aid for poorer nations.
U.K. natural gas for delivery next month lost as much as 3.7 percent to 57.2 pence a therm, the lowest intraday level since Dec. 2, according to broker prices compiled by Bloomberg. Lower gas prices may prompt some power generators to switch to the fuel, which requires half as many carbon permits as coal.
German baseload power for next month dropped 3.5 percent to 53.10 euros a megawatt-hour, the sharpest intraday decline since Nov. 1, according to broker prices compiled by Bloomberg. Lower prices can reduce the incentive to sell electricity forward, curbing demand for CO2 permits.
Negotiators at the United Nations meeting in Cancun, Mexico, agreed after two weeks of talks to a climate-protection package including a fund that would manage a “significant share” of the $100 billion annually pledged last year in aid for poorer nations by 2020 and a plan to reduce deforestation. They failed to agree on emission-reduction targets during the summit ended on Dec. 11.
‘Long and Challenging’
The meeting also approved carbon capture and storage projects as eligible to generate UN offsets, known as Certified Emission Reductions. CERs are issued to investors for projects to cut greenhouse gases in developing countries under the Clean Development Mechanism, the world’s second-biggest carbon market after the European Union’s cap-and-trade program.
The EU said on Dec. 11 the agreement was an important step on a “long and challenging” road toward a binding treaty to tackle global warming. The 27-nation bloc is on track to meet its internal target of cutting greenhouse gases by 20 percent by 2020 compared with 1990 and said it may deepen the goal to 30 percent should other nations follow suit.
It stopped short of doing so during the 2009 summit in Copenhagen, citing inadequate efforts by the U.S. and China.
The next UN summit aimed at ironing out a global climate framework for when the Kyoto Protocol expires in 2012 is scheduled to take place next year in Durban, South Africa.
‘Clear Signal’
“For the EU allowances market, the Cancun Agreements increase the likelihood of more ambitious long-term agreement in the future,” Bloomberg New Energy Finance said in a research note today. “However, the market risks getting ahead of itself if it believes the Cancun Agreements will lead to an international agreement involving binding emissions targets for the U.S., China and Japan --arguably prequisites for the EU to move beyond its current 20 percent target in 2020.”
UN offsets for delivery in December 2011 gained as much as 1.3 percent to 11.55 euros, the highest level since Dec. 2, and last traded at 11.43 euros. The contract lost 10.6 percent in the past six months because of uncertainty over the future of the CDM after the Kyoto Protocol’s expiry.
“Parties at COP16 sent a clear signal that the CDM will continue operation even if a gap will occur in 2013 between the end of the Kyoto Protocol’s first commitment period and entry into force of a subsequent treaty,” New Energy Finance said. “This is critical, as it looks very likely that a replacement treaty will not be in place by Jan. 1, 2013.”
The improved CDM rules “will expedite delivery of CERs from existing projects, and inclusion of CCS as an eligible technology type may also boost supply in the long term,” and that could pull down prices, New Energy Finance said.