Weekly carbon trading update –19th June, 2017

Market developments

  • Carbon ends the week down again as another 3.2% (16c) is wiped off the price
  • Close at the low sets a bearish tone heading into this week
  • Clean Dark Spreads (CDS) suffer as power falls and EUR/USD struggles to maintain recent strength
  • Tussle for responsibility results in MEP Julie Girling remaining as Phase IV rapporteur
  • EU agrees tighter non-ETS targets

EU Allowance Auction Overview

  • Auction volume markedly higher this week – ~22.1Mt v 12.8Mt last week
  • Upcoming July auction volume (~91.5Mt) is substantially higher than June (~83Mt)

Carbon Forward 2017 Programme has been released

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EUA Price Action

European carbon fell last week despite the lack of auctions caused by national holidays on Thursday. The week ended down 16c at €4.89 with a ‘holiday feel’ to many of the days. Much of the week’s carbon trading centred around €5 with tight trading ranges as the market lacked direction. However, the EUA benchmark contract failed to trade above €5 for the last two days, the first time since 24th May. The inability of price to climb whilst auction supply has been reduced turned the market’s focus to lower numbers. The main reason for lower demand is likely to be due to weakening clean dark spreads signalling that underlying utility demand is also on the decline. Falling power prices and the EUR struggling to maintain recent strength against the USD combined to move the CDS significantly below the recent highs. A full auction schedule resumes today and the next 6 weeks bring ~135Mt to market. Price Impact: carbon stepped out of its recent comfort-zone on Friday afternoon. Given the strong supply adding to the downside pressure this week the market is expected to find some direction that may well last deep into July.

Week ahead

The auction supply jumps by nearly 10Mt week-on-week as we return to a full auction schedule. All things being equal, prices should head lower. It is unlikely speculators will be buying in force at the current levels (we are in a bit of a technical no man’s land) so the utilities hold the key. The decline in CDS will not help the bull’s cause. The renewable power generation picture looks mixed with low hydro levels providing support but plentiful solar across much of Europe is expected. On balance, our outlook is bearish this and for the next few weeks but if prices have not fallen by the end of the week it could mean the bears have to wait a bit longer before they are satisfied.

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

MEP Julie Girling to remain as Phase IV rapporteur

MEP Ian Duncan’s attempt to take back control of the Phase IV reform legislation has failed with the chair of the European Conservatives and Reformists and other party officials backing his successor, MEP Julie Girling, to continue in the role.

Duncan handed over the reins to Girling last month as he focussed his efforts on winning a seat in the UK election, however, following his close defeat he had sought to resume control of the file.

The change in rapporteur should have no impact on the most material changes planned as the file is already at trilogue stage.

EU agrees tighter non-ETS targets

The EU parliament have adopted tighter targets for non-ETS sectors such as agriculture, buildings and transport as part of the EU’s effort sharing decision (ESD). By voting to use 2018, rather than 2020, as the starting point for emissions reductions it is estimated emissions will be 350-500Mt lower.

Under the ESD, member states are allocated permits called annual emissions allocations based on GDP per capita but flexibility options exist, including using 100Mt EUAs from the EU ETS.

It is now up to EU environment ministers to agree a position so trilogue talks can begin. Talks to strengthen the ESD match those of the EU ETS Phase IV reform which looks to substantially strengthen the market.

The impact of Brexit on effort sharing is yet to be fully explored by analysts and member states but it is expected that it will cause the rest of the EU to increase its efforts to reduce greenhouse gases.


Carbon Forward is back and Redshaw Advisors announced as official partner

Redshaw Advisors are pleased to announce that we will once again be the official conference partner and training day provider for the annual Carbon Forward conference to be held in London on 26th-28th September 2017. The conference will give carbon market participants from all over the world a greater understanding of the risks and opportunities they face in ever-changing carbon trading, regulation and taxation.

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.

Interested in attending or finding out more? Fill in your details here and you will receive regular updates on the latest speaker announcements, program developments and special offers. More information can also be found at www.carbon-forward.com.

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