Carbon Market Volatility to Jump on EU Overhaul Talks

By Ewa Krukowska, Alessandro Vitelli and Mathew Carr Sep 12, 2014 7:25 PM GMT

The calmest period in more than three years for the world’s biggest carbon market is set to end.

Citigroup Inc., Societe Generale SA and Commerzbank AG say prices will start swinging again after European lawmakers resumed talks this week on setting up a reserve to reduce a permit glut that drove the market to a record low. Sixty-day volatility for carbon futures surged by a quarter in April 2013 after politicians threatened to block a rescue plan designed to support prices.

Increased volatility will help traders profit from short-term buying and selling, according to Virtuse Energy s.r.o. in Prague. BASF SE says “politically induced” price swings push up energy costs and hurt investment in the 28-nation bloc. The four biggest peaks in volatility since 2011 followed political statements or regulatory changes to the $45 billion market, data compiled by Bloomberg show.

“If last year is anything to go by, it’s politics that will be dictating the trend on the carbon market in the coming months,” Paolo Coghe, an analyst at Societe Generale in Paris, who has followed the market since its 2005 inception, said Sept. 8 by phone. “We’re likely to see comments by lawmakers moving the market up and down.”

Carbon permit futures have climbed 64 percent from a nine-month low at the end of March to 6.10 euros ($7.88) a metric ton on the ICE Futures Europe exchange in London. Commerzbank forecasts an average 7.50 euros a ton in the fourth quarter, exceeding this year’s high of 7.41 euros in early March.

Price Turbulence

Volatility, an asset’s price relative to its average and expressed as a percentage, is about a fifth of the record reached in April last year when the 60-day rate soared to 145 percent. The measure fell to 28 percent on Sept. 3, the lowest since June 2011, ICE data show. It was at 29 percent yesterday.

“Volatility is good news because it increases the chance of profitable trading,” Jan Fousek, managing director at brokerage Virtuse, said by e-mail Aug. 21.

Ten traders and analysts surveyed by Bloomberg said price swings in the EU emissions contract will jump this year. Even at current levels, carbon volatility is higher than the 18 percent for West Texas Intermediate oil futures and more than triple the rate of S&P 500 index contracts.

Political Risk

Sixty-day carbon volatility, which has averaged 50 percent over the past five years, rose to 85 percent in the first quarter of 2012 as EU lawmakers examined a proposal to prevent energy efficiency measures from undermining demand for carbon permits. It rose to 60 percent in November the next year during the final steps of approving a temporary market rescue plan that would delay the sale of 900 million permits.

“Volatility of CO2 prices are acceptable if they are caused by market effects and not politically induced,” Claus Beckmann, head of energy and climate policy at BASF, the world’s largest chemical maker, said by e-mail on Sept. 5. “The main problems are the additional costs.”

The EU’s nine-year-old cap-and-trade program gives away or auctions allowances to about 12,000 factories and utilities, which need the permits to match their carbon dioxide output and avoid paying fines. Prices fell as much as 92 percent from their peak in 2008 after the financial crisis crimped industrial output, inflating the surplus of permits.

Reserve Resistance

After a two-month pause, representatives of EU member states resumed talks this week on a proposal to cut some of the trading system’s 2.1 billion spare permits and put them in a reserve. On Sept. 8, the EU Presidency invited comments on the plan from member states, which have two weeks to provide input before further talks are set. One carbon permit confers the right to emit a ton of carbon dioxide. Coal is the most carbon-intensive fuel.

The market reserve, which would start in 2021 under a European Commission proposal, would remove allowances or return them to the market depending on whether the surplus rises above or falls below set limits. It follows the strategy begun in March to postpone, or backload, sales of some permits until the end of the decade. Germany wants the reserve to kick off from 2018 to keep the backloaded permits from flooding the market.

“If countries express resistance to the reserve plan, that may weaken the price,” Barbara Lambrecht, an analyst at Commerzbank in Frankfurt, said Sept. 5 by phone. “More support for an early start would probably boost prices.”

Possible Agreement

The EU Parliament’s environment committee will organize a workshop at the end of October or early November to gather feedback for a report on the reserve, Ivo Belet, who is steering the draft law through the assembly, said Sept. 3. It’s too early to say if an agreement between the legislature, governments and the commission is achievable this year, or whether next year is more likely, he said.

Any volatility increase may be muted compared with that during the negotiations over backloading because of the longer timetable, according to Jaap van Dijk, head of environmental products trading at Citigroup in London.

“The agenda being discussed now isn’t short term. Rather than months, we are talking about years,” Van Dijk said in a Sept. 8 interview. “To market players, that has a different sound to it. The level of volatility depends on the momentum behind the debate.”

On top of the reserve talks, EU heads of state aim to reach a deal on the bloc’s climate and energy goals for the next decade. Almost half of the members of the European Parliament are new, following elections in May, increasing guesswork about the shape of a market overhaul, according to Bernadett Papp, an analyst at Vertis Environmental Finance in Budapest.

“Failure to implement the market stability reserve before 2021 won’t kill the market, but I expect that would mean prices staying at current levels for a long time,” she said.

To contact the reporters on this story: Ewa Krukowska in Brussels at; Alessandro Vitelli in London at; Mathew Carr in London at

To contact the editors responsible for this story: Lars Paulsson at Andrew Reierson, Dan Stets