The EU ETS April compliance deadline is approaching, will it influence carbon prices?
The approaching EU ETS compliance deadline on April 30th can have an impact on carbon prices. Last year, the price of EUAs spiked just before the deadline and fell afterward. Factors contributing to this volatility range from obvious to obscure. Analyzing these factors can help anticipate potential price movements.
Year-on-year increase in compliance buying: As companies face reducing free allocations and the prospect of higher prices, late compliance buying has the potential to positively influence carbon prices. While the exact extent of late buying is difficult to quantify, it is expected to increase each year, exerting a greater influence on EUA prices.
Political intervention and anticipated rule changes: Politics can have an unpredictable impact on EUA prices. Changes in regulations and policy decisions can create uncertainty, influencing market dynamics. However, the timing and effect of political interventions on prices are challenging to predict.
Release of emissions data: The European Commission typically releases the previous year’s emissions data at the beginning of April. While emissions data may seem relevant, it does not consistently act as a lead indicator for price movements.
Fuel fundamentals: Carbon prices are closely linked to the relative prices of fossil fuels, particularly coal and gas. Changes in fuel prices can affect the demand for carbon allowances. However, there is no specific relationship between fuel price movements and the compliance deadline in April.
Late EUA allocations: Delayed allocations of free EUAs to power generators in Eastern Europe can significantly impact the supply-demand balance in the short term. In 2016, the delay led to increased buying and rising prices. The timing of such allocations can be unexpected and have a material influence on EUA prices.
Considering the historical factors, it is unlikely that April 2017 will see a repeat of last year’s price spike. While there is a bullish political factor with the doubled intake rate of the Market Stability Reserve (MSR) and increased compliance buying, there are no current bullish influences from fuels. Moreover, this year’s total auction supply is higher than last year, and 2016’s emissions are expected to be lower. However, it is important to remain vigilant for unexpected developments in the EU ETS that could impact prices.
Louis Redshaw is the CEO and Founder of Redshaw Advisors Ltd., a company specialized in helping businesses understand and manage their carbon risk exposure.
