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By Bloomberg

Europe’s attempt to revive its carbon market is being thwarted by a lack of pollution.

The region’s warmest year in three decades has cut demand for heating while utilities are generating a record amount of power from renewables and the ailing economy is crimping manufacturing. Electricity producers will need only about a third of the extra carbon permits being sold in 2015, according to data from Markedskraft ASA, a consultant in Arendal, Norway.

EU lawmakers are seeking to boost prices to support clean- energy investments by reducing the amount of allowances in the bloc’s 41 billion-euro ($48 billion) emissions market. Carbon is flat after jumping a record 48 percent last year, according to ICE Futures Europe in London.

“What’s upsetting the carbon market this month is the abnormally mild weather,” Mark Lewis, analyst in Paris for Kepler Cheuvreux SA, said Jan. 13 by phone. “What worries me even more than the weather is the economic outlook.”

The World Bank this week cut its estimate for euro-area economic growth in 2015 to 1.1 percent from 1.8 percent.

Carbon emissions from German power plants probably dropped 5 percent last year to 301 million metric tons as record output at wind and solar plants “crowd out” coal-generated electricity, according to a preliminary estimate from Agora Energiewende, an energy researcher in Berlin. That’s the fastest decline since 2009.

2030 Goal

The EU wants to cut its emissions by 40 percent compared with 1990 levels by 2030, a plan approved by lawmakers less than three weeks before the U.S. and China announced their first deal to limit emissions. It reached its 2020 goal of a 20 percent cut eight years ahead of target.

Electricity generators’ need for carbon allowances will be about 3 million tons a month more this year than last on average, according to a December forecast by Markedskraft. That’s a third of the 9 million ton-a-month rise in supply that will be available at auctions, exchange data show.

“If we see continued mild weather, we will lower our demand forecast,” Espen Andreassen, a carbon analyst for Markedskraft, said Jan. 8 by phone. He estimates emissions in the EU carbon market area declined 4.7 percent last year to 1.7 billion tons on a basis that excludes some installations covered by the program only after 2008.

30 Euros

Carbon jumped 8.5 percent on Jan. 13 as some forecasters said temperatures would fall below zero and lawmakers met to discuss the reserve plan.

Allowances fell 1.5 percent to 7.14 euros a ton on ICE today at 11:15 a.m. in London. Permits are still a long way from levels above 30 euros a ton that would prompt utilities to switch to cleaner natural gas from coal, according to a Bloomberg calculator.

The main reason for last year’s emissions decline was the “very warm” weather during winter, Jan Frommeyer, director of market analysis at Reed Business Information’s Tschach Solutions, a Karlsruhe, Germany-based consultant that advises utilities and banks, said Jan. 7 in an e-mailed response to questions.

A westerly airflow is expected to bring above-normal temperatures and strong winds to Europe this month, particularly the U.K., according to a forecast made last week by MeteoGroup U.K. Ltd. Last year was Europe’s warmest, according to MDA Information Systems LLC in Gaithersburg, Maryland, whose records date to 1981.

Supply Withheld

Tschach estimates power-industry emissions will rise about 5 percent this year, assuming the weather returns to normal. Demand for carbon will rise should power prices recover faster than coal contracts, according to Elchin Mammadov, utilities analyst in London for Bloomberg Intelligence.

The EU in March began dealing with the market glut by withholding about half a year’s permit supply in auctions through 2016. It removed 400 million tons last year, will cut 300 million this year and 200 million in 2016, returning them for sale in 2019 and 2020.

The return of the withheld allowances will mean the market’s glut will more than double in size to 4.5 billion tons by 2020, according to Sandbag, the London-based environmental group. The bloc’s power-sector emissions probably dropped 8 percent last year, the group said yesterday in a statement on its website.

While the auctioned supply of carbon allowances will rebound by about 100 million tons this year, expected additional renewable capacity and energy-saving projects in the EU will trim demand, Mammadov said.

“Utilities may delay forward power selling and carbon buying during the next few months and will wait to see if oil and other energy markets rebound,” he said Jan. 6 in a phone interview. “In absence of a market stability reserve, we may see oversupply in the carbon market remain well beyond 2020.”