Weekly carbon trading market update 
Market developments
- Carbon closes the week at €4.96, 20c lower week-on-week
- Emissions trading was muted in the build-up to the European Parliament vote
- 2017 free allocations to be distributed in the coming days
- Parliament approves Phase IV reform file and gives MEP Ian Duncan the mandate to begin EU Council negotiations
- MSR 24% withdrawal rate passes, the more ambitious LRF and the cement import tariff both axed.
EU Allowance Auction Overview
- Five auctions bring ~22.4Mt to market, up from ~17.3Mt last week
- Additional 7Mt to be auctioned in March compared to February (~86.3Mt v ~79.3Mt)
EUA Price Action
Carbon moved 20c lower last week despite the EU parliament voting through a Phase IV reform file that included plans to double the withdrawal rate of the MSR. The week ended just under €5.00 having traded in a relatively tight 41c range. Price moves near €5.00 are running into bid support, likely from compliance buyers with freshly verified emissions data but speculators appeared happy to load up their short positions when prices tried to move higher in the run up to the vote. Emissions trading volume for much of last week was muted as the market waited for the EU parliament vote. The phase IV reforms passed with little fuss on Wednesday apart from a bit of EUA volatility in the few minutes around the amendment votes but things quickly settled down. We have analysed the Phase IV reform vote in an article available here. EUAs appeared to be heading for a bigger weekly loss but a rally on Friday afternoon kept prices above €5.00 with a small drift off into the close. Price Impact: Of all weeks, last week should have been an up week with lower auctions and a price supportive vote in the EU Parliament but we saw small losses as expected. The sideways emissions trading around €5 cannot continue indefinitely and bearish pressures are mounting that it seem only strategic buying can counter….
Week ahead
Obvious EUA price drivers are bearish. One more auction this week means ~22.4Mt come to market. 2017 free allocations will start to be distributed this week and even though selling by long installations is likely to be fairly limited there will be some, adding more to the volumes on offer. The weather has turned unseasonably warm in some parts of Europe and, finally, there is the prospect that March auctions bring an additional 7Mt to market when compared with February and 16Mt more than January. However, the market has so far held up and avoided the large falls below €5 expected by some. On the buy-side we have year-end compliance buyers providing something of a price back-stop, taking advantage of current prices that are just below last year’s average EUA price of €5.36. It is also likely that the EU parliament vote will have triggered at least some strategic purchasing by long-term shorts (e.g. electricity utilities). Unfortunately quantifying this extra demand is essentially impossible so the idea remains anecdotal. Finally, the market is trading short so if the compliance and strategic buying is big enough in the short-term to overcome the available supply then there is the chance of higher prices as speculators are forced to reverse their positions. Given the supply headwinds, that prospect remains a big if so our risk adjusted expectation is for lower prices.
