Carbon Emissions Trading Market Update – 12th January, 2015

Carbon emissions trading

Market Developments
• EUA prices continued to fall in the first half of the week, ahead of auction resumption.
• Overall bearish sentiment as European economic woes and oil price falls weigh heavily on CO2 and related commodities.
• Prices stabilize towards the end of the week without any clear direction however Friday’s close of €6.80 is the lowest since 12th December.
• Total German emissions expected to have fallen by 3% in 2014. Fall due to mild weather, higher renewable generation and development of greener technology.
• South Korean carbon trading opens at 7,860 won ($7.26) and is the world’s second largest CO2 market.
• Italy (finally) adopts Reverse Charge VAT mechanism for carbon trades

Auction Overview
• EEX’s 2015 EUA auction volume will be 558Mt vs. 462Mt in 2014.
• Return of the auctions to full capacity this week with 11,952,000 EUA’s and 1,494,000 EUAA’s for sale.

The EU registry will be closed for 48 hours from 07:00 GMT on 13TH January to 07:00 GMT on 15TH January

Price Action
Carbon emissions trading prices fell a further 4% last week as the return of auctions and an overall bearish sentiment weighed heavily on carbon prices at the beginning of the week. The auctions returned on Wednesday with nothing exciting to note regarding the clearing prices and bid cover ratios, however, the supply looks to have caused the market to shift back down to early December prices and the market appeared to be pushed down harder (than in late 2014) just ahead of auctions to rebound soon afterwards. Additionally, a strong bearish sentiment developed in the early part of the week as the Greek crisis, rumours of more quantitative easing in Europe and heavy oil price falls created a ‘perfect storm’ in European and global markets alike.

There were heavy falls across most markets and in most commodities, particularly coal and German power which set record lows in the week. Prices stabilized towards the end of the week with little clear direction on future price movement. The intra-week low of €6.68 traded on Wednesday (day of first auction) and despite a recovery to €6.95 on Thursday the market closed at it’s lowest since 12th December at €6.80 on Friday. It is unclear if utility hedging has gone back into top gear since the resumption of the auctions and with German power prices hitting record lows last week, it is unlikely there was much forward selling of power and thus create ‘normal’ demand. Without this demand the market looks well supplied, probably a little oversupplied when considering that the temporary demand provided by the closing of speculative short positions that were established between Christmas and the auction resumption.

Price Impact: With a low close on Friday usually a bearish signal going into the week ahead, it is possible we see a further drop in the early part of this week. With the first full week of auctions supplying 11.95mt of EUA’s and a further 1.49mt of EUAA’s the market is well supplied. Much will depend on the levels of utility hedging and any recovery in power prices relative to the fuels.

Total German emissions expected to have fallen by 3% in 2014
German emissions are expected to have fallen by 3% in 2014. A combination of mild weather, high renewable electricity production and investment in energy efficiency cited as the leading drivers of the fall. So far the German economy has remained relatively strong with industrial demand fairly robust, any falls in production have a significant effect on the demand for carbon. Impact: With the largest economy in Europe, Germany is seen as the leading indicator of the economic health of the region, one to watch however with 300Mt (15% of allocation AND auction volumes) being removed from auctions this year under the ‘backloading’ legislation it will require a big decline in European industrial output for carbon emission trading prices to be materially affected.

South Korean Trading starts
South Korean carbon emission trading kicked off this morning on the national exchange, opening at 7,860 won (approximately $7.27 / €6.16) and ending the day at 8,640 won (approximately $7.99 / €6.77). The South Korean Emissions Trading Scheme is the world’s second largest behind the EU ETS and its development signals a growing trend towards carbon cap and trade within Asia.

Market Stability Reserve (MSR) update
Nothing new to report beyond noises that the EPP (largest political party in Europe) backs it including frontloading the reserve with the backloaded allowances. As a reminder the important MSR dates are:
• 13th January, 2015 – EU National Government representatives meet to discuss MSR
• 22nd January, 2015 – ITRE vote
• 21st/22nd January, 2015 – Evironment Committee considers proposal amendments tabled
• 24th February, 2015 – Environment Committee vote

Italy adopts Reverse Charge VAT mechanism for carbon trades
As of 1st January, 2015, Italy adopted the Reverse Charge VAT mechanism to help combat VAT fraud within the Italian market, more evidence for which continued to emerge throughout 2014. Reverse charge VAT means the buyer has to pay the VAT rather than the seller. Previously, VAT was being stolen by criminals who sold on allowances with a VAT charge but failed to hand over the money to the relevant authority. Impact: none, however, beware when buying allowances in Italy, VAT should not be charged.