Europe's carbon market is set to lose a third of its value this year as an oversupply of permits worsened, battering average prices and increasing pressure on European governments to provide support.
The world's biggest carbon scheme, the European Union's Emissions Trading System (ETS), was valued at a record $148 billion last year by The World Bank but analysts say that is likely to have fallen to around $100 billion, a level not seen since 2008.
"The EU market's value in 2012 is set to decrease by around 30 per cent, to near $100 billion," said Matteo Mazzoni, carbon analyst at Nomisma Energia, citing a drop of over 40 per cent year on year in average EU carbon prices.
Analysts at Thomson Reuters Point Carbon also see a 30 per cent drop in value. According to their preliminary estimates, the ETS was worth around €50 billion euros ($63 billion) in 2012, down from €76 billion last year.
The value of trade over exchanges, which forms the bulk of activity, was down 32 per cent in 2012 at €34.9 billion, while over-the-counter trade fell 33 per cent to €15.6 billion, according to Marcus Ferdinand, senior market analyst at Point Carbon.
Prices on the carbon market, which the EU is counting on to encourage industry to switch to greener energy, have languished due to a slowdown in European economies and an oversupply of carbon permits.
This year, delays to a European Commission plan to withhold some carbon permits to reduce the oversupply and therefore boost prices created volatility as speculators and participants traded on the back of developments.
Analysts have warned that if the plan is not passed by member states early next year, carbon prices could fall further.
Carbon prices traded between €6 and €9 for most of 2012, touching a record low below €6 this month.
A 70 per cent drop this year in the average price of United Nations carbon credits, which can be used to comply with the ETS, also impacted the EU market's value.
Analysts said the estimated fall in monetary value could have been even greater if the market had not been on track for a 10 to 15 per cent rise in volumes in 2012, mainly due to increased activity from an unprecedented number of carbon auctions in the last quarter.
Disappointed with low, range-bound prices, several firms have left the EU and UN carbon markets. Banks such as KfW have cut staff, and some, such as Barclays, have sold off some carbon assets.
Trading houses have reduced their exposure by entering other markets.
Emissions exchange Bluenext, owned by NYSE Euronext and Caisse des Depots, used to have the biggest market share of spot trading, but was also a casualty of the lack of liquidity when it closed this month.
Its German rival EEX has also waived fees and launched a rebate scheme to attract carbon traders to its platform. Prices in 2013 are not forecast to rise - they are expected to average €6.66 versus around €7.50 this year according to a Reuters poll of analysts conducted this month - but some analysts see higher prices from 2015.
Those who have stuck with the market are mainly players that have to comply with the scheme, which is legislated to run until at least 2020. These include utilities and industrials and banks which buy and sell carbon permits on their behalf.
Utilities are making money from the scheme, albeit less than in previous years, by trading and arbitraging several spread, swap and option products, as well as coal and gas generation spreads.
"Utilities are the predator of the market. Their skills and knowledge will allow them to get the maximum out of it, in any circumstance," said Nomisma Energia's Mazzoni.
"Big banks follow. Less prepared and less focused operators, like small and medium enterprises and small traders, are the ones who are having to try more," he added.
There is still a valuable role for intermediaries, such as banks, said Trevor Sikorski, Barclays' head of carbon research.
"For those who are hedging and helping people hedge, there is still volume," he said.