Weekly carbon trading update –12th June, 2017

Market developments

  • Carbon ends down 10c as fight to significantly advance on €5 level goes on
  • Continued disruption to auction schedule
  • Clean Dark Spreads fall but remain near year-to-date highs
  • UK election throws Brexit negotiation plans into turmoil
  • Macron reignites push for carbon price floor
  • EPP call for EUAAs to be distributed to industry

EU Allowance Auction Overview

  • Auction volume tumbles to ~12.8Mt, down from ~17.9Mt last week
  • June auction volume similar to May (~83Mt) as public holidays continue to fragment auction calendar

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EUA Price Action

Once again carbon tried but ultimately failed to advance significantly on €5. Carbon first managed a close above that level on 26th May as the clean dark spreads spiralled higher but has since stumbled, with any further gains quickly cancelled out. Buyers were in control at the beginning of the week as the lack of an auction on Monday led carbon to a high of €5.28. However, sellers, emboldened by a lack of follow-through despite the bullish fundamentals took over and pushed prices lower into the close on the expectation of the resumption of auctions on Tuesday and Wednesday.  Climbing power and gas prices led a strong return for carbon on Thursday as the Qatar turmoil threatened to disrupt global LNG supplies. The impact on European gas prices through the summer season is likely to be muted as supply is plentiful. However, if the turmoil rages into the winter season the bullish effect could become more pronounced, in turn providing support for EUA prices. The UK election had little immediate impact on the carbon market (see Other News for a longer-term assessment) as prices traded in a tight range on Friday with muted volumes. Over the week the clean dark spreads fell slightly but remain near year-to-date highs maintaining the hedging incentive for utilities. Price Impact: carbon appears to be comfortable in the €4.90 – €5.20 range at present. Sellers will be bouyed by the upcoming auction volumes for the rest of June and July and buyers comforted by the strong clean dark spreads. However, at some point we will see a definitive move out of this range…..

Week ahead

Another reduced volume auction week should help keep prices above €5 in the short term. However, this is the last of the auction disruption until August when volumes halve. The interim will see 6 weeks of full auctions bring ~135Mt to the market. The lack of recent gains for carbon with a reduced auction supply would suggest prices will fall in the interim period. As usual much will depend on the utilities hedging behaviour. Continued clean dark spread strength coupled with the reduced volumes on offer in August may mean the utilities underpin prices as they advance their hedging to cover for the August decline. We have a neutral outlook this week.

Window of opportunity? The compliance deadline is out of the way for everyone for another year but the real carbon risk, MSR-induced price change, doesn’t go away so conveniently. The medium-term outlook for carbon prices is bleak but Energy Aspects’ longer term forecasts tell us that they are set to move substantially higher. To discuss your exposure and how we can help you get on top of it before the market reacts to the MSR’s start in January 2019, feel free to get in touch: info@redshawadvisors.com

Other News

UK election throws Brexit negotiation plans into turmoil

The surprise reduction in the Conservative Party’s majority has thrown Theresa May’s Brexit negotiation plans into turmoil. The move to call an election as May sought a bigger majority to give her a clear Brexit negotiation mandate has backfired as the Conservatives failed to win enough seats to take overall control. They will now have to rely on the support of the Democratic Unionist Party (DUP). The DUP support Brexit but wish the border with Ireland to remain as ‘seamless and frictionless’ as possible.

There is unlikely to be any short-term impact on the EUA price, however, a ‘soft Brexit’ approach now becomes more likely. Louis Redshaw of Redshaw Advisors gave comment in a Carbon Pulse article “In terms of the EU ETS, it probably means a nice, managed exit or no exit at all because the Tories lost their mandate, and this may translate into stable EUA prices because we avoid the volatility that could come with a hard Brexit,”

Macron reignites push for carbon price floor

Emmanuel Macron is said to have reached out to Germany for support in implementing an EU ETS price floor in the wake of the US decision to exit the Paris climate accord. Macron is said to be seeking a price floor of €30 a tonne and wants other European nations to back the proposal.

It is not the first time there have been calls for an EU wide floor price, however, Member States have typically rejected the idea, fearing its impact on industry and jobs. The idea is also unlikely to gain traction until the MSR has been given a good chance to deliver the promised higher prices.  However, we can say one thing for certain, current prices are under pressure from all sides to be ‘fixed’.

EPP calls for EUAAs to be distributed to industry

The EPP have called for aviation allowances (EUAAs) to be distributed to European industry, calling the more generous cap on aviation ‘unfair’. The aviation cap only requires a 5% reduction in emissions, by contrast, industry’s cap will result in a 43% reduction by 2030. Currently, industrials covered by the EU ETS cannot use EUAAs to meet compliance obligations.

The EPP believe delays to Phase IV trilogue talks mean the proposal could be considered concurrently with separate legislation looking at aviation coverage in the EU ETS. Both pieces of legislation now have the same rapporteur: MEP Julie Girling has assumed control of the Phase IV file from MEP Ian Duncan.


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Brexit, the ‘Trump factor’, an ambitious Phase IV reform package, the Chinese ETS launch in 2017 and the development of a global offsetting system for the aviation industry mean carbon risk is higher than ever. To successfully manage this risk companies need a thorough understanding of how carbon markets and regulation across the globe affect them and their competitors, Carbon Forward is designed to provide that understanding.

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