Carbon has biggest weekly gain since May as EU cuts handout

European Union carbon permits posted their biggest weekly gain in four months as the bloc’s regulator scaled back the handout of free allowances, reducing the risk of a sell-off by polluters.

December allowances climbed 17 percent this week, the biggest increase for the period since May 3, on the ICE Futures Europe exchange in London. The European Commission yesterday lowered its allocation of free allowances to industry by 12 percent through 2020, and delayed selling an additional 66 million metric tons of permits until next year.

The reduction means emitters from ArcelorMittal (MT) to Total SA may preserve their existing holdings or will need to buy more allowances in the market to make up any difference. The shortfall is about 4.3 billion euros, based on an average price of 5.71 euros a ton for benchmark December futures through 2020.

“Traders probably consider industrial sales will be muted in the coming months due to the relatively aggressive correction,” Itamar Orlandi, an analyst in London for Bloomberg New Energy Finance, said today by e-mail. “The bullish price reaction indicates that traders were relieved to see additional auctions delayed to 2014.”

Carbon traded as high as 5.43 euros ($7.15) a ton on ICE, the highest since Feb. 18, before paring gains. Permits closed 7 percent higher at 5.33 euros a ton.

Distribution delay

The EU’s eight-year-old emissions-trading system allocates permits for free or auctions them to about 12,000 factories and utilities, which must surrender enough to match their discharges of carbon dioxide or pay fines. Those that emit less than their quota can sell unused allowances.

This year’s distribution was delayed as countries adjusted to the start of the EU trading system’s third phase, which began in January and runs until 2020. As of this year, utilities in western Europe no longer get free permits, while east European generators will have to buy 30 percent of their allowances at auctions, rising to 100 percent by 2020.

The distribution of permits was scaled back after countries requested more than the amount available. The cutback is 5.7 percent this year and increases to 18 percent for 2020, according to the commission.

German power

Emissions also rose as power prices advanced. German electricity for 2014 has jumped 5.8 percent since Aug. 30, the biggest weekly gain since March 2011, broker data compiled by Bloomberg show. Power prices can move in line with carbon, which affects generation costs.

“The sharp rise in German 2014 power in the past three days triggered buying of carbon,” Milan Hudak, an analyst at Virtuse Energy sro in Prague, said today by e-mail. “Rising permit prices triggered buy orders from traders who had bet on the contract falling further.”

The EU decision to cut free permits will add several hundred million euros to energy costs in Europe and sheds “a completely new light” on a proposal by the commission to temporarily alleviate a glut, according to the European Confederation of Paper Industries.

“It is information that should have been on the table in the backloading debate, where proponents of strong measures pictured the industry as not having to buy any credits in the coming period,” said Marco Mensink, the deputy director general for the paper lobby group.

The draft measure to postpone the sale of some permits, a process known as backloading, was approved by the European Parliament in July. The proposal will be considered by member states after Sept. 22 elections in Germany, EU Climate Commissioner Connie Hedegaard said Aug. 27.

The market is reacting positively to the EU’s free permit reduction “not because it makes a real difference to the oversupply situation, but because it’s a sign the EU may mean business,” Mark Meyrick, the head of carbon trading at Eneco Energy Trade BV in Rotterdam, said today by e-mail.

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