Frustrated carbon traders try other commodities

EU carbon market diversification sees banks and traders shift from depressed emissions permits into futures for crude oil, natural gas, gold, and base metals amid weak cap-and-trade prices and surplus allowances.

Some carbon emissions trading desks are expanding or diversifying into other commodities as continued low carbon prices and a weak UN climate deal have dulled the market.

Several large banks in the European Union's emissions trading scheme (EU ETS) already operate in other energy or commodities markets. Some smaller participants are seeking to diversify as well.

Paris-based COER2 Commodities will start trading crude oil futures, natural gas, gold and base metals from mid-January, adding to its existing carbon emissions trade. "This was part of our strategy since last September. We want to be more involved in the futures commodities markets which is our real core business," a company spokesman said.

Fortis Bank Netherlands started to diversify into other European energy markets toward the end of last year.

"I have put my best people on soft commodities and oil. At the moment I don't see there is a proper business to be had in carbon given cheap carbon credits in the market today," Seb Walhain, the bank's head of environmental markets, told Reuters.

EU permit prices, considered the global benchmark for utilities and industry, fell by 21 percent last year and are now down nearly 60 percent from 2008's highs.

The economic downturn reduced industrial output considerably, and EU carbon emissions fell as a result, which dampened the need for emissions permits.

A watered-down climate agreement in Copenhagen last month depressed the market further as many players hoped for tougher carbon emissions caps, which would increase permit demand and send prices higher.

Analysts expect prices to remain depressed at least until the second half of this year, mainly because industrial companies have a large number of surplus permits. Mass selling could drive prices even further south.

The global market for carbon credits edged up to $136 billion last year, compared with a World Bank estimate of $126 billion for 2008, Oslo-based Point Carbon said.

Last year, several trading firms decided to expand their emissions desks in anticipation of a new global climate agreement and an EU-Kyoto link to cut costs, followed by a U.S. cap-and-trade market.

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