London (Platts)--16Feb2009

A drop in CO2 emissions in 2008 among installations covered by the EU
Emissions Trading Scheme was driven primarily by fuel-switching, according to
a report released Monday by UK-based consultancy New Carbon Finance.

Even with the impact of the financial crisis and ensuing economic
recession on emissions, the drop in 2008 emissions was primarily driven by
power generators switching from coal and lignite to natural gas, said NCF.

CO2 emissions from EU ETS installations totalled 2.1 billion mt in 2008,
down 3% from the previous year, it said, releasing estimates that are two
months ahead of the official release of verified emissions data for the EU by
the European Commission.

"Even taking into account reduced economic output, [the] analysis
indicates that the largest cause of the reduction is the EU ETS itself
encouraging greater use of gas in power generation," continued the report.

Emissions from industrial sectors included in the EU ETS fell by 5% in
2008, and were driven by the downturn in construction in countries such as
Spain and the UK, and the severe crisis affecting manufacturing sectors in the
fourth quarter of the year, it added.

"Cement was the worst hit by the recession, with output falling 17
million mt, or 9%, over the course of 2008. Steel production was also hit by
the slowdown in both automotive sales and the downturn in construction,
decreasing 30% in the last quarter to finish the year at -6%," it said.

CO2 emissions from the power sector fell 2% to 1.5 billion mt in 2008,
despite total generated electricity rising 0.3%, the company said.

"This was underpinned by a fall in emissions from power stations running
on coal and lignite as well as higher recourse to gas for power generation.
Other factors explaining the fall in emissions were an increase in generation
from wind and hydropower, higher nuclear availability in the UK and Spain, and
finally, high EUA [EU Allowance] prices throughout most of the year," it said.

NCF estimated that the carbon price was responsible for 40% of the fall
in 2008 emissions, with the recession accounting for a further 30%.

"When the supply of Certified Emission Reductions from the [UN] Clean
Development Mechanism is added to the EU ETS cap, it becomes clear that there
is a surplus of credits for 2008 compliance. This indicates that some CO2
reductions in 2008 were driven by a desire to bank credits into the post-2012
market, when the scheme is expected to be much tighter," the company said.

In an interview Monday, NCF analyst Olivier Lejeune said his company
estimated that 2008 EU ETS emissions stood at 2.11 billion mt, down from 2.18
billion mt in 2007--a drop of approximately 70 million mt.

"When you look at fuel-switching fundamentals, they've actually been a
bit more favourable to coal, which would have indicated higher emissions,
although that's quite trivial. It's a very small increase in coal compared to
gas," he said.

But he said emissions data from power stations in the EU show that gas
usage increased "massively" in 2008, and that coal and lignite burn dropped
significantly.

"So our interpretation is that the EU ETS is the only explanation for
it," said Lejeune, adding that putting a price on carbon had succeeded in
making coal more expensive relative to gas.

Lejeune said although 2008 is expected to be net-long on EUAs, the price
has not collapsed to zero because of recognition that the supply balance in
future will be much tighter.

Since EUAs can be "banked" between the 2008-2012 Phase II period into the
2013-2020 Phase III period, this was prompting some participants to hold onto
allowances with a view to much higher prices in future.

"Your allowances have a value in the future. We're facing quite a big
recession in Europe but that's only for 2008 and 2009, and probably the
situation will improve in two or three years time," he said.

"Also the scheme will become much tighter in 2013, so we see buyers who
keep them for later use, and that's probably why you still have some demand
for allowances in the market now," he said.

NCF estimates that the EUA price in 2020 will be Eur55/mt ($70/mt) and in
the range of Eur30-40/mt during Phase III as a whole.

The Phase III cap is expected to be about 15% tighter than Phase II,
while Phase II was about 10% tighter than the 2005-2007 period, concluded
Lejeune.