By Michael Szabo
LONDON (Reuters) - European carbon traded nearly 7 percent lower on Wednesday as traders locked in profits after EU emissions permits hit a new two-year high earlier in the session, traders said.
Benchmark EU allowances dropped 2.51 euros or 8.6 percent to an intraday low of 26.82 euros, before clawing back to close at 27.99 euros a tonne, down 1.34 euros or 4.6 percent.
Volume was very strong at 7,973 lots traded.
One source told Reuters the selling kicked off after a trader started dumping large volumes of EUAs early Wednesday.
The Dec-2008 delivery contracts traded up to 29.69 euros a tonne early in the session set its fourth new two-year high in as many days, reaching levels not seen since April 2006.
"We've come up so far, so fast that it's only natural for prices to come off a bit," a London-based emissions trader said.
Dec-08 EUAs are still up around 25 percent this year, having gained more than 10 percent in June alone.
European power forwards, which are correlated to carbon prices, staged a sharp turnaround on Wednesday, with benchmark Calendar Year prices falling by more than 6 euros from new record highs they had posted earlier in the session.
Benchmark crude oil futures rose more than $2 to $143 a barrel after a U.S. government oil inventory report showed a sharp drop in crude oil supplies.
"The CO2 market is looking more and more like the crude oil market. Its very volatile," another trader said.
CERs, the project-based offset credits under the Kyoto Protocol, held on to gains on rumors that the French government will announce it would link its emissions registry to the U.N.'s Kyoto trading system, called the International Transaction Log (ITL), before other EU member states.
A senior official at France's emissions registry told Reuters, quoting members of the French environmental ministry, that the rumors were incorrect.
Dec-08 CERs trading on the European Climate Exchange hit an all-time high of 23.38 euros before retreating to close at 22.34, up 0.43 cents or two percent.
The EUA-CER spread now lies at 5.65 euros, the lowest level since the first quarter of 2008.
The European Commission has said it wants all 27 member states participating in its Emissions Trading Scheme to connect to the UN scheme at the same time.
The EU said last November it would complete a link between its collective carbon trading registry, called the Community Independent Transaction Log (CITL), and the ITL by April 2009, the deadline for companies to hand in emissions permits to cover 2008 emissions.
It was thought that, for technical reasons, an EU member state participating in the EU scheme could not simultaneously connect to the ITL.
The EU-UN link had been expected in 2007, and a delay beyond 2008 may complicate the settlement of December-delivery futures, which are the benchmark contracts in the carbon market.
The French official said the connection date would be more clear after preliminary system tests are completed by the registry in early August, though market observers expect the EU to be linked to the ITL in time for December deliveries.
For additional analysis on the carbon markets, go to http://www.reutersinteractive.com
(Reporting by Michael Szabo; editing by Christopher Johnson)