Carbon Emissions Trading Market Update – 19th January, 2015

EUA Carbon trading

Market Developments

EUA carbon trading price action sees carbon jumping by the most in 11 months on Tuesday
• EUA carbon trading market ends week up 42c
• European Parliament’s ITRE committee signals support for an early MSR start.
• ITRE committee meets this week and votes on MSR
• ENVI committee meets this week and votes on MSR
• forecast a 4.5bn EU Allowance overhang by 2020 and an 8% drop in EU power plant emissions in 2014
• Shenzhen carbon increases 22%
• China launches CCER registry

EU registry set to close for maintenance on 3rd February

Price Action
Carbon prices were strong last week ending 42c higher. On Tuesday prices leapt up 59c, the highest price rise for 11 months indicating that market participants were caught short. With hindsight the warning signs were there as prices had already more or less halted their downtrend by close of business Monday and on the morning of the big rally prices were drifting up before and during the auction, normally a tell-tale sign that the market is short. The downtrend was squarely ended that morning but the announcement that the ITRE committee was considering recommending a 2019 start to the MSR had the remaining shorts clambering over each other for the exit resulting in a sudden ramp of prices in the late afternoon. The market has since digested the comments and drifted slowly back down a little over the rest of the week. Cold weather forecasts also added some buying support but were a minor contributor to the rise. Europe’s woes deepened during the week with the Euro reaching it’s lowest levels for some years against major currencies. Bearish sentiment still remains but support for carbon evidently remains despite the higher volume auctions in 2015. Support is also coming from German Clean Dark Spreads (CDS) with power price slipping 25c last week relative to coal’s €1.93 slip (see table). Price Impact: most significant is that price drops last week have failed to overcome Tuesday’s rally, there is no clear trade or trend at the moment but continued support from cold weather and the clean dark spreads may lead to continued gains. €7.50 will likely cap rises if it gets there, subject to MSR shocks from meetings this week.
As our weekly goes to press more leaks suggest certain members of ITRE are increasingly keen to support early implementation of the MSR and the market has reacted.

China launches CCER registry and Shenzhen prices strengthen
The climate change division of the National Development and Reform Commission (NDRC) announced last week the launch of a national registry for Chinese Certified Emission Reductions (CCERs). This will provide a centralised repository for transactions to be completed and recorded. CCERs currently trade at a huge discount to the emission allowances available across the seven Chinese carbon markets.

Shenzhen carbon credits appreciated 22% on the China Emissions Exchange since the 16th January, according to Bloomberg.

Market Stability Reserve (MSR)
The Industry Research and Energy (ITRE) Committee met last week and will meet again this week to vote on the MSR. The ENVI committee meets this week and votes next month. The MSR reserve mechanism automatically adjusts the amount of permits in circulation, removing 100Mt of allowances per year when the surplus exceeds a given limit and returning them if there is a shortage. It appears that the EU Parliament is generally supportive of the MSR. However, rather than have the MSR start in 2021 as initially proposed by the Commission, there is a push by several member states such as Germany, France and the UK to have an earlier start in 2017 and shifting the 900Mt backloaded allowances straight into the reserve.

On Tuesday news reports started to emerge in relation to ITRE’s meeting. The suggestion was that the rapporteur, Antonio Tajani, was forced to accept a 2019 start date for the MSR though some of the leaked text partially contradicted this by stating that the MSR would be in place by 2019 but injections into it would only start in 2021. This was enough to cause shorts in the market to rush for the exit because it suggested that the committee most likely to object to the MSR is keen to find a compromise and it suggests that a start date earlier than 2019 is possible.

This morning (Monday 19th) there were more specific leaks from the committee (meeting today) whereby four groups (Socialist, Liberals, Greens and European United Left / Nordic Green Left) want the MSR to start in 2017. ITRE meet today and if there is no agreed position a vote will be held between the position of the parties above and that of the EPP and Conservatives.

Price impact: Expect more news and volatility this week.

As a reminder the important MSR dates are:
• 22nd January, 2015 – ITRE vote
• 21st/22nd January, 2015 – Environment Committee (ENVI) considers proposal amendments tabled
• 24th February, 2015 – Environment Committee vote

Sandbag predict a 4.5bn EU Allowance overhang by 2020.
Their full report and more information on EUA carbon trading can be accessed HERE. The overhang being largely driven by EU power emissions’ decline. The timing presumably designed to inform the various discussions by ITRE and ENVI.