Market Developments
- EUA carbon price closes the week at €8.58, up 7c week-on-week
- Calendar 16 clean dark spreads strengthen
- Study finds most EU ETS costs being passed on to customers
- Auction calendar for 2016 released
- COP21 Preview: what does it mean to you?
Auction Overview
- 952Mt comes to market this week in four auctions
- Volume falls to 32.7Mt in December, down from 59.8Mt in November, due to Christmas shutdown. Last auction 17th
EUA Price Action
The EUA price closed the week at €8.58, a week-on-week rise of 7c (0.8%). It was a quiet week with a trading range of just 20c and a small week on week change of 7c. The market was well supplied by 5 days of auctions and the cover ratios and clearing prices were relatively weak on Monday and Wednesday. Nonetheless this did not stop the price advancing to a high of €8.67 on Wednesday and Thursday and a weekly price increase. At one point it appeared that the market could push on and test the high of the year at €8.71, however, prices failed to climb above €8.67 for 2 days despite a strengthening Calendar 16 clean dark spread as power price gains outstripped carbon and coal’s. Price Impact: The drift higher continues and there is no material reason that this trend will not continue especially as there is an auction shutdown looming and the coming week only sees ~11.9Mt come to the market via auctions, down from >15Mt for the last 3 weeks. The market is likely trading long and there is always the risk that year-end profit-taking may be triggered by repeated failure to breach the recently established high of the year (€8.71).
European Commission survey finds companies are passing through EU ETS costs
A study commissioned by the European Commission and unearthed by Carbon Pulse has found that a significant number of industries are able to pass through EU ETS costs. This weakens the case for maintaining free allocations to industrial participants as the current carbon leakage proposals are reviewed for Phase IV (2021-2030). The cement, iron, steel and refineries sectors were found to have particularly high pass through rates which is in direct contradiction to the lobbying positions of those industries. With the study not assessing whether any market share had been lost due to pass through costs it is hard to determine the effectiveness of existing ‘carbon leakage’ protection provisions.
COP21 Preview: what does it mean to you?
Conference of the Parties (“COP”) number 21 starts today in Paris and is bringing together delegates from 195 countries to try and agree a global deal to tackle climate change. All countries have been tasked with submitting Intended Nationally Determined Contributions (INDCs) ahead of the meeting in a bid to try and encourage countries to set their own targets to keep global warming below 2 degrees. The INDCs should increase the chances of agreement of a meaningful climate change pact in Paris because the goals are nationally driven from the bottom up rather than regulated by the UN from the top down. With the political stars aligned (the majority of major participating countries are not close to election cycles) and both the USA and China apparently keen on an agreement there are high hopes for a deal.
So what does this mean for an installation in an existing cap and trade scheme? In the short term it probably means very little as, particularly in Europe’s case, anyone already taking their climate change responsibilities seriously will likely not be compelled to take them more seriously by anything coming out of Paris (for example Europe’s 2030 reduction target of 40% is unlikely to be surpassed therefore the EU will not be under pressure to reduce emissions further). However the following considerations should be made:
- Companies with a global footprint should consider how their emissions in all of their operations will be treated post COP21 – in the future cap and trade will affect more than a handful of countries.
- European companies should be prepared for adjustments to the current Phase IV proposals, in particular in relation to leakage list protection – if the EU’s competitors are limiting carbon too there will be less room for protectionism.
- A ground-swell of support for carbon reduction could embolden countries to ratchet up reduction targets in the medium term as each successive COP seeks further unification of effort. This could ultimately include Europe.
- One thing is a near certainty, administrative burden will increase for companies as monitoring, verification and reporting requirements are expected to be the main legally binding outcome from COP21.
To dig a little deeper into the likely outcomes from this year’s COP please see this excellent article by Stig Schjølset of Thomson Reuters.
We’ll be keeping a track of developments so you can also follow us on Twitter to stay up to date.
The week ahead
COP21 is unlikely to have any impact on EUA prices but might lead to some positive or negative market sentiment depending on the progress of the discussions. A slow grind higher into year-end is the likely outcome with some volatility injected by potential profit-taking and auction suspension.
