Carbon Prices Experience Sharp Decline as Greek Crisis Causes Turmoil in Global Markets

On Monday morning, the carbon prices faced a significant setback, dropping by 20 cents to reach an intraday low of €7.25 on the December 2015 contract. This decline was a direct result of the ongoing Greek crisis, which had led to the closure of Greek banks for the week and the implementation of capital controls. The turmoil in Greece had a ripple effect on global markets, causing nervous investors worldwide to seek an exit strategy.

The European Central Bank (ECB) played a pivotal role in the situation by withdrawing the financial support that had been keeping Greek banks afloat due to the failure to reach a consensus on bailout terms. As a result, the responsibility for deciding on the bailout package was handed over to a Greek referendum. Trevor Sikorski, from Energy Aspects, suggested that without bailout funds, Greece was likely to default on its IMF loan. While this default wouldn’t necessarily require Greece to exit the Eurozone, it could severely hamper any hopes of avoiding a “Grexit,” particularly if the €3.5 billion bond repayment to the ECB scheduled for July 20 were to default. Sikorski emphasized that the ongoing saga would take another few weeks before all the implications were fully understood.

Contrary to speculation, the issue of the Grexit primarily pertained to the monetary union and did not question Greece’s membership in the European Union. Therefore, participation in the EU Emissions Trading System (ETS) was not at risk for Greece.

Even if Greek carbon emissions trading entities were tempted to sell EU Allowances (EUAs) as a precautionary measure, they would likely face restrictions on accessing the funds, as Greek banks were limited in replacing Euros with the uncertain value of the Drachma. Furthermore, the Greek crisis had a more significant impact on European economic growth, which subsequently led to a decline in carbon emissions.

Trevor Sikorski noted that the downside risks of the Greek crisis were considerably lower than in 2011 when carbon prices fell from €16 to €12. He highlighted that the risk of financial contagion to neighbouring markets was reduced, as banks had reduced their exposure to Greek sovereign debt over the years. Additionally, the EU ETS had fewer non-compliant carbon emissions trading participants compared to 2011. The previous scenario had involved a large number of market participants with speculative long positions, exacerbating the downward pressure on prices as those positions were closed.

By the end of Monday morning, carbon prices managed to recover slightly, reaching €7.45 on the front December contract.