EU Carbon Permits Fall to Three-Week Low on 'Huge Overhang'

(Bloomberg) - EU carbon-dioxide permits fell to a three-week low as a “huge overhang” of allowances damped demand while their premium over United Nations offsets widened.

EU allowances for December dropped 36 cents, or 2.3 percent to 15.02 euros a metric ton as of 4:55 p.m. on London’s European Climate Exchange. That’s the sixth day of declines and the lowest intraday level since Sept. 24.

“There is a huge overhang” of EU allowances that might last until the end of the decade, said Alan Svoboda, executive director of sales and trading at CEZ AS, the Prague-based utility. “It’s unfortunate the carbon-dioxide market is not strong enough,” he said today at a Platts emissions market conference in Brussels.

The premium of European Union carbon permits for 2010 over offsets from the United Nations advanced to its widest level in more than nine weeks as UN supply rises.

The spread between EU permits and UN credits for 2010, traded as a separate contract, increased as much as 11 cents, or 5.5 percent, to 2.10 euros a metric ton on London’s European Climate Exchange. The spread was 2.03 euros at 5:55 p.m., the biggest gap since Aug. 16.

The spread between EU allowances and Certified Emission Reductions from the UN “should slightly widen for all maturities,” Emmanuel Fages, the Paris-based head of power, gas, carbon and coal research at Orbeo, said in an e-mailed report yesterday. Orbeo is the carbon-trading venture of Societe Generale SA and Rhodia SA.

‘Downside Risk’

There is “more downside risk” for CER prices, Fages said. “The growth in CER issuances observed during recent weeks should push prices down.” Some 2.98 million credits were given out in the week through Oct. 19, according to data on a UN website. Some 5.64 million have been handed out this month.

Investors in emission reduction projects under the UN’s clean development mechanism are “cashing in” credits “to mark the profit before the end of the year, Marius Frunza, head of structuring at Sagacarbon, the trading and advisory arm of French investment company Caisse des Depots et Consignations, said today in an e-mail.

”The bird in hand theory says in an uncertain market, before Cancun in December, it’s better to take profit from what you have now, hence to sell” emission credits, he said.

UN offsets for December slumped 2.5 percent to 13.07 euros a metric ton. The contract has fallen 4.5 percent so far this month, according to data compiled by Bloomberg.

By Catherine Airlie and Mathew Carr

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