By MATHEW CARR and ALESSANDRO VITELLI
Companies in Europe, which need allowances to match their
emissions output, will be short of as many as 100 million
permits a year through 2016, according to Goldman
The gap, worth 647 million euros ($884 million) at recent
prices, compares with a surplus of 2.1 billion euros in 2012,
EU data show. Carbon futures may more than double by next
year to 15 euros/ton amid the curb, said UBS.
The glut, accumulated since 2008, drove carbon permits to a
record low and threatened the viability of the worlds
largest emissions market. The European Commission is trying
to lift prices to levels to discourage the use of fossil
fuels and spur cleaner energy by scaling back permits. That
is threatening to push up costs for factories, which have
sold surplus permits for cash, as their need increases just
as the 18-nation euro region is emerging from its longest
Most industrials werent creating a problem for
themselves by selling carbon permits that were surplus to
requirements, said Fred Payne, a carbon trader in
London at CF Partners, which advised Portugal and Hungary on
emissions trading. Now, its an important decision
whether or not to sell something that youre going to
Under the EUs nine-year-old emissions market, permits
allowing the holder to emit one ton of carbon dioxide into
the atmosphere are either allocated for free or auctioned to
about 12,000 factories and utilities that must have enough to
account for their discharges or pay fines amounting to 100
euros a ton.
About half of the permits are given away to factories for
free, with the remainder sold at auctions. Starting last
year, most power utilities need to buy the majority of their
permits in almost-daily sales.
EU carbon allowance prices more than doubled from a record
low in April and gained 30% this year to trade Friday at 6.47
euros/ton on ICE Futures Europe in London. That compares with
a 0.9% gain in the Standard & Poors GSCI gauge of
Prices plunged from as high as 31 euros in April 2006 as the
financial crisis damped industrial output, curbing the need
for pollution rights. Emissions from companies covered by the
EU carbon market dropped 12% in 2012 compared with 2008,
according to EU data compiled by Bloomberg New Energy
Emitters received for free about 13 billion euros of surplus
permits from 2008 through 2012, EU data show. The commission
decided to reduce the supply of free permits proposed by
nations in the eight years through 2020 by an average 12%,
according to an Oct. 22 statement. The cap will be cut by
Economic output in the euro region will probably rise 1% in
2014, after contracting for two years, according to the
median of 56 economists in a Bloomberg survey.
Business confidence in Germany, the regions biggest
economy, is at its highest level in 2 1/2 years.
Europes factories plan to boost spending by 3.4% this
year after a cut of 2.7% in 2013, an EU survey shows.
The improving economy will probably spur some factories to
buy permits to meet compliance needs just as supplies shrink,
according to Russel Mills, the Midland, Michigan-based Dow
Chemicals director of global climate change policy.
The largest US chemical maker is facing a shortage in the
eight years through 2020 and is poised to buy permits, Mills
said, adding that some companies have probably hoarded
allowances because of the reduction in handouts.
HeidelbergCement, the worlds third-largest cement
producer, may have to buy permits in the period, said Rob van
der Meer, its director of EU public affairs in Brussels. The
Heidelberg, Germany-based company sold some of its surplus in
the eight years through 2013, generating a significant
amount of money, he said, declining to provide details.
From 2017 onwards, the situation for the group might
change, depending on the cement market development, and we
could be short, he said Jan. 23 in an interview.
The talk of a deficit may be premature as Europes
recovery is still too fragile to spur demand for permits from
the 1,063 companies in the program, Olav Botnen, a senior
power analyst at Arendal, Norway-based Markedskraft AS, said
Inflation (ECCPEST) unexpectedly slowed to 0.7% last month,
the weakest since October when the figure fell to the lowest
since 2009 and contributed to a surprise November interest
rate cut by the European Central Bank.
Permits may retreat this year to below 5 euros, or a 23% drop
from yesterdays close, as factories forecasting a
surplus will sell some of the 1.3 billion handed out in the
next few months, Botnen said.
ArcelorMittal, the emitter with the biggest 2012 permit
surplus, may incur additional costs to buy allowances to
comply with rules through 2020, the Luxembourg-based company
said in its annual report, without providing details.
Europes biggest steelmaker had 36.6 million tons of
spare permits two years ago, EU data show.
The current EU climate and energy policy is set to lead
to major shortages for the manufacturing industry: surpluses
in ETS credits built up during the economic slowdown in the
crisis years will soon become history, said Robrecht
Himpe, head of European business optimization at
The emissions trading system already means that even the most
energy efficient steel plants will have to buy about 30% of
their allowances by 2020, Himpe said.
Lafarge, the worlds second-biggest cement maker, sold
excess European permits for a total 99 million euros in 2012,
down from 177 million euros the previous year, according to
its annual report. Lafarges 13.1 million-permit surplus
in 2012 was the third-biggest in Europes emissions
system after ArcelorMittal and Tata Steel, EU data show.
Christel des Royeries, a Paris-based spokeswoman, didnt
respond to phone messages and e-mails for comments on the
While the surplus of permits built up since 2008 reached an
unprecedented 2.4 billion tons on Dec. 31, half the total is
already tied up by power utilities to cover future emissions
and about another quarter is held by factories, according to
James Cooper, an analyst at Bloomberg New Energy Finance in
London. That leaves fewer freely available for companies to
meet compliance needs.
The amount will be reduced this year when the EU starts to
temporarily withhold 900 million permits from auctions
through 2016. The plan known as backloading is expected to
start in the middle of next month, the commission said in a
Feb. 11 statement. Isaac Valero-Ladron, a spokesman on
climate for the European Commission in Brussels, declined to
The auction cuts mean utilities will have to purchase about
1.4 billion tons of allowances more than governments plan to
sell through 2018, equivalent to 75% of the regions
annual supply, said New Energy. Prices may climb to as much
as 22 euros by 2016, a level last seen six years ago, if
factories start stockpiling permits, Cooper said.
Almost all our clients are short of permits
through 2020, said Jan Fousek, managing director and owner of
Virtuse Energy sro, a Prague-based broker that advises
manufacturers on carbon markets. Most of our clients
are short even over the next two to three years.
As the economy improves, emitters with a surplus of
allowances will be under less pressure to sell to bolster
finances, according to Matthew Gray, an energy analyst for
Jefferies Group in London. They may increasingly stockpile
permits in a similar way that groups such as the Organization
of Petroleum Exporting Countries keep reserves of
commodities, said Gray.
Industrials are like the OPEC of the emissions trading
system, not because they will coordinate sales, but
because they know they will probably hold more pricing power
in the future as climate rules tighten, he said.
Polluters should consider buying permits in the next two
years to match expected levels of output as prices are poised
to gain, said Steve Waygood, the chief responsible-investment
officer at Aviva in London, which holds ArcelorMittal shares.
There was a point a couple of years ago when so many
commentators were negative on the market itself that it
looked plausible that the emissions trading system might be
done away with, Waygood said. I dont think
thats true today.