Carbon Emissions Trading Market Update – 23rd February, 2015

Carbon consultancyMarket Development

• Carbon price continues to rise on Monday morning and hit a high of €7.90. Thereafter price fell through the week.
• German power and coal follow similar pattern as prices strong at the start of the week before suffering sizeable losses.
• Clean dark spread remains relatively unchanged as prices fall in the 3 contributing commodities.
• Further reports of disagreement on the MSR proposal lower prices as positive sentiment deflated
• Fate of the unused EUA allowances to be the main price driver in MSR policy changes according to Tschach Solutions.

Auction Overview
• EUAA auction takes place on Wednesday to contribute to total of 13.4mt entering the market this week (EUA – 11.952mt, EUAA – 1.448mt)

Price Action
Carbon prices fell 4.28% (33c) week-on-week as the market re-traced some of the previous week’s gains. Weaker fuels contributed to the carbon sell off as German power and coal suffered sizeable losses through the week. The positive sentiment from the previous week carried over into Mondays trading as the price hit a 2 year high of €7.90 on the front December contract. Buoyed by strong German power prices it looked like prices were destined to hit €8. However the tide turned in other markets and from there on the price fell through the rest of the week as the market experienced an orderly sell off, support was initially provided by the psychological €7.50 level but it failed to hold. It is probable that there was some profit taking as prices neared €8 having reached their highest since 2012. The clean dark spread has remained relatively unchanged through the week as power price falls were mirrored by coal, however, it is unlikely utilities were rushing to sell power in a falling market so demand for carbon from them is likely to have been relatively low in the latter part of the week. Further carbon falls can be attributed to reports of disagreements on the MSR proposal to be voted on in the ENVI committee on Tuesday 24th February as well as traders reducing long positions ahead of the expected volatility. More on this in the MSR section below. Needless to say, with the vote on Tuesday, the market remains more sensitive than ever to MSR developments. Price Impact: much will depend on the MSR vote on Tuesday as the market looks to it to provide direction. A positive vote outcome should lead to support for the market and some price gains, however, a negative outcome could lead to large falls in price as carbon market traders head for the exit citing a lack of political support for material reform.

Market Stability Reserve (MSR)
Reports suggesting there was not uniform support for the MSR proposal from Belet weighed on prices as the positive sentiment towards reform was deflated. The current proposal suggests an MSR start sometime within 2018 (likely to be the very end of the year), the reports suggested the proposal was not good enough for the Greens and Socialist and Democrats who are still pushing hard for a 2017 start. Previously it was thought they would support the proposal, however, the reports put this in doubt as it is possible they will vote against the current proposal.

Further analysis of the MSR proposal has cited the fate of the backloaded allowances and unused EUAs as the main driver to future price evolution. According to Tschach Solutions a 2017 v 2019 start will only alter price forecasts by €2 whereas placing all 1.6 billion surplus allowances straight into the reserve has the power to drive a fivefold increase in prices to €35 (€35.80 to be precise!) The surplus allowances are made up of 900mt of backloaded allowances, the New Entrant Reserve (NER) allowances and also any unallocated allowances held back from the market to cover closures of carbon emission compliance entities.

Price Impact: volatility centered around the Environment committee vote on Tuesday. We will send out separate analysis of the outcome tomorrow. As we go to press the carbon price has risen to €7.68, up 40c from today’s low on latest EPP proposal which guarantees full transfer of backloaded allowances to MSR, but keeps MSR start date by 31 Dec 2018. With the market volatility and changes in the EU ETS, effective position, cost and risk management becomes key and carbon consultancy is an ever growing market.