LONDON - Dwindling prospects a strong climate deal at a U.N. summit in Copenhagen were likely to knock carbon permits under the European Union emissions trading scheme, traders said, and prices fell to a two-week low on Thursday.

Prices for the carbon permits called EU Allowances (EUAs) fell five percent to around 13.60 euros ($19.59) a tonne.

Some traders and analysts saw varying scope for further falls, ranging from the limited and temporary to the drastic, as the likelihood of a deal being clinched for a successor to the Kyoto Protocol looked increasingly remote.

Other market participants remained hopeful a deal could emerge, however, which would hold up prices.

But as dozens of heads of state arrived in Copenhagen, the failure of negotiators to draft a coherent text so far suggested they had a mountain to climb.

TUMBLING PRICES

Carbon prices could fall as low as one cent if there is no lasting agreement in Copenhagen, said Seb Walhain, head of environmental markets at Fortis Bank Netherlands.

Copenhagen is dreadful and a disgrace. Carbon will fall until there is some hope for a permanent agreement, he said.

If the market stays like this I will shut down the carbon desk for a year or so, he added.

Many players in the EU emissions trading scheme (ETS) have bought EUAs in the second phase (2008-2012) on expectations of tighter emissions caps in the third phase (2013-2020), which has propped up prices, Walhain said.

A lackluster end to Copenhagen could prompt players to sell EUAs, just as high expectations at the start of talks made some players buy them, sending prices higher.

I guess a status quo scenario is already priced in, though not as bad an outcome as we might be heading for. Then the market could lose 1 to 1.50 euros next week, said Emmanuel Fages, carbon analyst at Societe Generale/orbeo.

If a deal collapses on Friday, prices could fall through the next technical support level on historical price charts of 13.40 euros, an emissions trader said.

12.75 is the first hard floor but 12 euros could be reached in case of total failure. At around 10.50 euros, I think some utilities will support the market, he said.

OPPORTUNITY

U.S. President Barack Obama's arrival in Copenhagen on Thursday could give the talks the push needed to drive a deal through, said Andrew Ager, head of emissions trading at Bache Commodities.

If there is no deal it could be disastrous but the framework is there and there has been a huge run-up to this. This is a tremendous opportunity to generate and grow a green economy, he said.

Few people have got their fingers on the buy or sell button right now as they are either in Copenhagen or on Christmas vacation, which could make them take a wait-and-see approach until Monday.

Whatever the outcome, the impact on the carbon market should be limited to a couple of days, said Matteo Mazzoni, carbon analyst at Italy's Nomisma Energia.

In the longer term, prices will be pretty steady. There is not so much volume right now as we come up to Christmas, so prices shouldn't be pushed too far down, he said.

(Reporting by Nina Chestney; Editing by Anthony Barker)

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