Oslo, 24 August 2011: Point Carbon

The EU emissions trading scheme will be oversupplied until at least 2017 thanks to economic turbulence and dampened industrial activity in the 27-nation bloc, analysts at a Luxembourg-based hedge fund said late on Monday. 70Watt Capital, which trades spreads in energy and carbon markets, estimated that the EU scheme will have a surplus of 800 million EU allowances and U.N.-backed offsets at the end of its second phase in 2012, meaning carbon prices could stay depressed for years to come.

Earlier this month, EUAs hit a two-and-a-half year low of 10.25 euros, eroding gains made in March when Germany closed 8 GW of nuclear capacity due to safety concerns after natural disasters ravaged Japan’s atomic industry.

“(Assuming) the eight reactors are taken offline as planned, the surplus will be absorbed by 2018,” said Kris Voorspools, director and market analyst at 70Watt, in an emailed report.

Based on EU-wide annual economic growth of 1.8 percent, he forecast that EUAs could rise to around 21 euros by 2020, representing a 65 percent premium on current prices of 12.75 euros.

However, if anti-nuclear sentiment spread across the EU and led to the closure of a further 4 GW of nuclear power, the surplus would shrink by 9 percent to 730 million by 2012 and send EUAs to 25.7 euros by 2020.

Such a move would mean any surplus carried forward from 2012 would be eroded a year earlier in 2017, Voorspools said.

Using a probability distribution analysis based on several different scenarios, Voorspools said there is a 10 percent chance that EUAs could soar above 38 euros by 2020, but also an equivalent likelihood they could crash to zero in the same timeframe.

Ends --

By Michael Szabo  - for Commodities Now.

www.pointcarbon.com