Carbon Emissions Trading Market Update – 2nd March, 2015

carbon marketsMarket Development

Carbon markets price closes up 38c at €7.76 on Monday after EPP MSR compromise agreement released ahead of Tuesdays ENVI vote.
• Amendments pass ENVI Committee with little fuss.
• Prices end the week at €7.15, down 23c week-on-week.
• Further uncertainty on MSR fuels price falls as 8 governments confirm intention to form a blocking minority against early start.
• Weaker clean dark spreads: coal rises outstrip power rises in Europe, EUR weakness exacerbates coal price gains.

Auction Overview
• Full week of auctions with 15.075mt coming into the market

Price Action
Carbon market price action was dominated by the ENVI Committee vote this week. The vote took place on Tuesday and passed with a large majority, however, the price had already moved up on Monday ahead of the vote as news detailing an MSR compromise position agreement between the S&D and EPP parties caused a sharp upward movement on prices. The compromise agreement essentially meant the largest parties in the European Parliament had agreed on the start date and the future of the backloaded and unallocated allowances. The vote on Tuesday was something of a formality as it passed easily by 58 votes to 10. Further analysis on this can be found below. With a 91c range on the EUA Dec 15 contract, volatility again remained high. Monday’s bullish price moves were followed up on Tuesday morning before the vote, however, prices tailed off after this to spend most of the rest of the week falling. This can be explained by a number of factors. Firstly some profit taking as those traders who had been long going into the vote headed for the exit as the bullish price moves had run their course. Secondly, uncertainty surrounding the next stages of the MSR process weighed heavily on the market as doubts surrounding a ‘blocking minority stand-off’ arose. It is thought compromise is going to need to be found as the more ambitious MSR member states can block a late start date and at the opposite end of the spectrum those against the MSR can also block ambitious early start dates. The uncertainty, at a minimum, will have caused long position reductions. Thirdly, weakening clean dark spreads can be thrown into the bearish mix as power price rises were outstripped by coal price rises. The weakening EUR means coal, priced in USD, rose by 5% last week. This pushed the clean dark spread levels for 2016 below €4.00 and likely lead to lower demand for carbon from the utilities. Price Impact: volatility is likely to remain high as information on member state positions and likely compromises breaks cover. With several large member states such as Spain yet to formally state their position, their stance could be crucial to the eventual agreed shape of the MSR.

Market Stability Reserve (MSR)
The next step for the MSR EU ETS reform is for Member States to agree their position (meeting to be held later this month) and for trilogue negotiations to take place. Essentially this will require some member state compromise due to the blocking minority uncertainty as described above. A letter sent on behalf of Cyprus, Bulgaria, Croatia, Czech Republic, Hungary, Lithuania, Romania and Poland outlined their collective opposition to an earlier introduction of the MSR than the EC’s originally proposed 2021 start date. The letter states the MSR EU ETS reform will have significant economic, social and financial consequences for member states and for industry prone to carbon markets leakage (despite the leakage compromise contained in the ENVI position). Interestingly, analysts are suggesting the main price driver for carbon markets will be the future of the backloaded and unallocated allowances rather than the start date. It is also worth noting that, with publication of the letter, the bad news is already out there. No news or even good news are the more likely to follow. To receive comprehensive, independent analysis from our partners, Energy Aspects, please register your details HERE