Veteran Trader Is Most Bearish on Carbon in Another Year of Hurt

08/12/2016Bloomberg Businessweek

By Mathew Carr (Bloomberg)

Ten years ago, carbon trader Louis Redshaw thought Europe’s policy makers were serious about using markets to combat climate change. Now, he’s not so sure.

The former head of emissions trading at Barclays Plc expects the price of pollution rights to plunge another 38 percent in the next 12 months after halving this year. Redshaw, 44, who founded Redshaw Advisors in 2014, now buys carbon for clients from airlines and refiners to food and drink companies, is the most bearish of 10 analysts and traders surveyed by Bloomberg News on next year’s price outlook.

European regulators are struggling to contain a record glut of permits that’s pushed prices in the $48 billion market down 86 percent since 2008, eroding the penalty for burning dirty coal and weakening incentives to invest in renewable energy. A three-year program to cut the number of allowances available has failed to boost prices and the next regulatory intervention isn’t planned until 2019.

“The EU believes it’s setting an example by having a carbon market, but the truth is the region’s leaders don’t believe in allowing market forces to reduce emissions,” Redshaw, who also worked at Enron Corp. and the trading unit of Electricite de France SA, said in an interview. “To make the market go up, someone’s got to buy up the excess.” Allowances will plunge to about 2.50 euros ($2.69) a metric ton by the end of next year, according to Redshaw, who says he hasn’t been this bearish since prices almost hit zero nine years ago. His estimate compares with a median forecast of 5 euros a ton in the survey for 2017, compared with 5.40 euros predicted for the end of 2016.

That contrasts with the more bullish outlook for other commodities including Brent crude, which is seen rising almost 2 percent next year, according to the median of three analysts’ forecasts made since OPEC’s last meeting on Nov. 30. Benchmark carbon futures for December have slumped 48 percent this year to 4.28 euros on the ICE Futures Europe exchange in London.

The EU gives away or auctions allowances to factories, utilities and airlines, which need them to match their carbon dioxide output or pay fines. After handing out more permits than companies needed, the EU in 2014 reduced the surplus by temporarily withholding supplies from almost-daily auctions. As those curbs come to an end, and utilities switch to cleaner-burning natural gas, about 520 million additional permits are set to enter the market in the next two years, according to Redshaw. Soaking up that extra supply would cost more than 2 billion euros at current prices. Industry consultant Energy Aspects Ltd. in London estimates the accumulated surplus will increase by 7.1 percent in the next two years to about the same as the EU’s annual supply.

Anna-Kaisa Itkonen, a spokeswoman for the European Commission in Brussels, declined to comment on the outlook for the market. Read more about how Europe’s carbon market reform is evolving Europe is preparing its next measures to deal with the
glut, which include a market reserve mooted as early as 2013 that will automatically control supply. The EU parliament’s environment committee will vote on the reforms Dec. 15 before they are considered by the whole plenary and EU nations next

“We expect optimism associated with the market stability reserve,” said Espen Andreassen, an analyst at Markedskraft ASA. While next year’s supply is a “bearish risk,” efforts to meet Paris climate agreement goals may drive prices higher, he said. He forecasts 6.50 euros next year, matching the highest in the survey.

Prices will languish unless lawmakers make further interventions, according to Mia Bodin, an analyst and partner at Bodecker Partners AB, an energy risk manager in Malmo, Sweden. She sees permits at around 5 euros by the end of 2017. “I find it difficult to believe they’ll make the market tight beyond measures already approved,” Bodin said. “You’ll need to see the supply coming down before you believe it.”