The price of the European Union carbon allowances (EUAs) traded in Europe's emissions trading scheme dropped eight per cent in early trading this morning, hitting an 18-month low of €19.10 (£15.43).
Experts said the slump in prices, which had cleared €25 earlier this year as oil prices soared, were prompted by the falling price of oil and growing fears of a deep global recession.
Oil hit a 17-month low today with US light crude trading at $62.38 a barrel and Brent at $60.30, less than half the record prices recorded this summer. Meanwhile, Japan's Nikkei index fell 6.4 per cent today, hitting a 26-year low, and the FTSE 100 fell 5.6 per cent at one point as fears of a deep global recession continued to stalk the market.
Kjertsti Ulset, analyst at research firm Point Carbon, said it was inevitable that the EU carbon market would be impacted by the falls.
"Oil is down, so the price of EUAs is down," she observed. "On top of that any potential recession would mean lower emissions from industry which would result in lower demand for carbon credits."
The price of carbon credits track the oil price as lower oil prices result in a reduction in the cost of natural gas, which in turn encourages energy generators to switch from using carbon-intensive coal to cleaner, natural gas. As a result their demand for carbon credits to cover their emissions tends to fall, leading to lower prices.
Ulset said that the downward pressure on carbon prices was likely to continue as long as fears remained that a recession will lead to significant drops in industrial production, energy demand and oil prices.
She added that Point Carbon was now working on new EUA price forecasts to account for the new economic backdrop. The company currently predicts that the average price for EUAs during the 2009 to 2012 period will stand at €37 a tonne, but Ulset hinted that this could be downgraded, arguing that the floor price of €18 to €20 now looks "a bit high".
However, she argued that some upward pressure on carbon prices still remained, particularly in the longer term. "The outlook for phase III [of the EU emissions trading scheme, from 2013] still looks very bullish," she said, adding that despite ongoing negotiations between EU member states about the rules governing the scheme, the underlying emission caps still looked "pretty strict" .
A fall in the number of emission reduction projects being commissioned in developing economies, partly as a result of the credit crunch, could also drive up carbon prices, according to Ulset.
"A lot of European companies import credits from outside the EU using the UN's Clean Development Mechanism," she explained. "We're seeing upward pressure on prices there as a result of a lower than expected flow of credits and that could help drive up prices of EUAs as more firms turn to them instead."
By James Murray
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