Slumping EUA price makes an equity bounceback look unlikely

European carbon allowances are slumping alongside share prices. As the value of the FTSE 100 dropped yesterday by 5.5 per cent, EUA 2008 future prices dropped by 6.6 per cent. The price of emissions allowances continues to drop this morning, reaching a five month low of EUR 18.50.

Many traders are pointing to some of the usual drivers of the carbon price, particularly the wholesale price of energy, which has fallen over the past few weeks. That doesn’t add up at all – such a pronounced drop in the EUA price could not possibly be unrelated to a simultaneous plunge in equity markets.

It looks like the market is adjusting its view of the likely demand for carbon allowances over the next 11 months. An economic downturn means lower greenhouse gas emissions, and therefore increased supply of allowances and reduced demand. This does not make the EU ETS any less effective in reaching emissions targets – but it does reduce investment in clean technology.

This view makes an equity bounceback look unlikely. The vast majority of participants in the EUA market are EU ETS installations, meaning that they have a statutory requirement to hold a number of allowances that cover their emissions. A sell-off among these companies reflects gloomy growth prospects.

Note that carbon prices are much more volatile than share prices. A little under a year ago, the EUA 2008 price dropped below EUR 13. If the FTSE 100 was at 3000 last year, the share losses of the past few days would look quite different.

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One Response to “Slumping EUA price makes an equity bounceback look unlikely”

  1. […] traders sillier than we thought February 7, 2008 Comments on In Balance a few weeks ago seem to have overestimated the maturity of the EUA market. Essentially, the article […]

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