Carbon Emissions Trading Market Update – 09th February, 2015

Carbon marketsMarket Development

• 38c price range as market fails to find a clear price direction, support at or above €7.00 found in close each day, ends week at €7.02.
• Disagreement still apparent in Environment committee as Socialists and Democrats stick to 2017 start for MSR while EPP favour a later start date.
• Norway (non EU but EEA member) back MSR but would rather a tightening of the cap and increase in the reduction factor.
• Tony Abbott faces a vote on his leadership of the Australian Liberal Party – could this re-open the debate on carbon market emissions trading in Australia?

Auction Overview
• Thursday and Friday auctions have the highest bid cover ratios of the year so far. The number of participating companies also high.
• There is no UK auction this week but there is an A auction so volume for sale is reduced by around 1.6Mt.

Price action
The carbon market traded in a relatively tight range (38c) last week as the market failed to establish a clear price direction. With a high of €7.25 on Monday and the low of €6.87 on Thursday the market drifted off slowly as the week went by. In another week of subdued carbon market emissions trading volumes and a full auction calendar the only thing likely to stir things up were reports out of the Friday ENVI meeting on the MSR but these didn’t materialize (see below). The back end of the curve was also quiet again, reflecting reduced clean dark spreads and thus indicating lower utility involvement. Despite this the final two auctions of last week had the highest bid cover ratio of the year so far. This is not necessarily a sign of price support (‘false’ support bids from long-positioned companies are not unheard of, however, the number of bidders is slightly higher). Price Impact: With the Environment committee vote still a few weeks away, subject to fuel price moves and weather, it is possible we will continue to see prices drift before activity intensifies again around the vote.

Market Stability Reserve (MSR)
The scheduled ENVI meeting on Friday 6th Feb gave us no new insight into their thinking. There is still disagreement as Socialists and Democrats stick to 2017 start for MSR while EPP favour a later start date with a compromise not yet apparent. There were reports of the EPP (the biggest political grouping in Europe) having reached agreement at an internal meeting last week on a 2019 start for the MSR and partial injection of backloaded volumes into the reserve. Full backloading and some form of early start still appears to be the most likely outcome.

ENVI’s vote is on the 24th February and will provide more insight (and volatility). The process from there is not likely to be smooth as the signs are mixed: there are sufficient member states to form a blocking minority for an early start and Germany and France are apparently steadfast in their demands for a 2017 start. IETA gave an insightful presentation of the politics at work at Tschach Solutions analyst conference in Brussels last week. They have kindly granted us permission to distribute their presentation to interested companies, please get in touch for a copy. Their view on member state positions is below:

Pro early start & BKL in reserve: 11 MS (164 votes, 61.6% of total EU population represented)

Opposed to early start but support BKL in reserve: 5 MS (42 votes, 6% of total EU population)

Opposed to both early start & BKL in reserve: 6 MS (74 votes, 16% of total EU population)

Blocking minority opposed to early start: 11 MS (116 votes, 22% of total EU population):

Important MSR dates are:
• 11th February, 2015 – Environment Committee meeting
• 24th February, 2015 – Environment Committee vote

Australia – Abbott in crisis
Tony Abbott faces a vote on his leadership of the Australian Liberal Party this week as rumours are rife on a return to leadership for Malcolm Turnbull, the man he replaced as leader in 2009. With confidence in Abbott sliding, the carbon markets emissions trading sceptic faces a serious challenge to hold on to his leadership. The main manifesto promise of Abbott’s election campaign was the abolition of the carbon market emissions trading scheme Australia had been due to start shortly after the election. He succeeded in repealing the emissions trading scheme in favour of his Direct Action plan. Turnbull is an emissions trading supporter, however should he take over the reins it is unlikely we will see a wholesale shift back to an emissions trading scheme, maybe more of a softening of approach to the other environment policies Abbott had sought to repeal.