Weekly carbon trading update – 23th October 2017

Market developments:

  • Carbon gains 3.5% to end the week at €7.57.
  • Intra-week price spike caused by ‘Brexit clause’ passing key hurdle and fuelled by strengthening intra-week clean dark spreads.
  • German power in contango in 2020 due to Dutch carbon floor price expectations
  • Redshaw Advisors are hiring. Check it out and share our link with anyone you think may be interested.

EU Allowance Auction Overview:

  • Higher cover ratios (2 days were over 3 times covered) last week suggest there is good underlying demand for EUAs
  • Auction volume this week rises slightly to ~22.1Mt (vs ~21.5Mt)
  • Auction supply will remain high in October as ~91.5Mt comes to market, slightly down on September’s ~91.8Mt

EUA PRICE ACTION
Carbon moved another 26c higher last week amid longer-term power price rises and a positive Trilogue vote on the ‘Brexit clause’. The first 2 days of the week were unexciting, however coincident with the build-up to the Trilogue meeting on Wednesday afternoon, European power prices were on the rise thanks to expectations of a €18/tonne carbon floor price being introduced in the Netherlands infecting wider power markets. While this news was over a week old by this time and is in fact bearish for carbon (it will cause CO2 emissions to drop in the NL), the impact on neighbouring country power markets and carbon took a while to be felt. Power prices in Germany moved into contango (i.e. longer term power prices are highest) and despite the risk that other countries follow the NL example, power producers increased their hedging to take advantage of the longer term profit margins. This in turn supported carbon that only needed a nudge, that came from the expectation of a positive outcome from the Brexit clause Trilogue vote, to jump higher. The vote outcome wasn’t public knowledge until after the market close on Wednesday so Thursday price action was led by the less savvy speculators catching up with events and the market biefly touched €8.05 early in the morning, the highest level since 6th January 2016. A ‘buy the rumour, sell the fact’ sell-off then ensued over the next 2 days bringing EUAs back to €7.45 before a small recovery into the close on Friday. The relatively weak sell-off and the weekly price gain tell us that underlying demand for carbon conitnues to outstrip available supply. Price Impact: the regular drip drip of bullish news for carbon markets provides ample explanaton for the price rises of recent months and it is hard now to imagine when these influences will abate, especially as we edge into winter’s higher demand period. Absent new developments the wind will eventually come out of the sails of demand (utilities can only continue elevated rates of hedging for a limited period) but exactly when that happens is impossible to predict.

WEEK AHEAD
The relentless gradual rise in carbon prices will continue so long as the bullish influences are maintained, so keeping a keen eye on power markets and policy developments is essential. The UK could respond to the ‘Brexit clause’ at any time and such is the uncertainty that they could just as easily come up with a response that sends the EUA market up as down. However, all the important markets are showing signs of exhaustion after such relentless price gains. So, if the uptrend can be broken (EUAs close below €7.30 or so) there is a good chance of a short-term correction. We have called a neutral outlook for several weeks and prices have nonetheless risen for a variety of unpredictable reasons. With a gun to our heads we are calling a bearish outlook this week because the odds of continued bullish news are dwindling and while carbon has risen throughout the last few weeks, it hasn’t gained in price anywhere near as much as power. Volatility is the one certainty with large moves to the downside more likely than a big move upwards. But after the developments of the last few weeks, we’re ruling nothing out!


OTHER NEWS

Dutch carbon price floor tax explained
“The Netherlands is introducing a CO2 floor price in the electricity sector. As from 2020, the price per [metric] ton of CO2 emitted in that sector will be Eur18. This figure will rise to Eur43/mt in 2030,” said Stientje van Veldhoven, a Dutch lawmaker (Source: Platts). The exact amount of tax will depend on the price of EUAs at the time but NL power generators can expect to pay €18/tonne as a minimum from 2020. This follows the success of the UK’s carbon floor price top-up tax that has drastically reduced coal burn in the UK (the UK later simplified the policy to a flat tax plus continued compliance with the EU ETS, a return to a top-up tax from 2020 or 2021 is expected in the November budget). The proposed NL policy boosts long term power prices (i.e. from 2020) and thus clean spark spreads. It is actually bearish for long term carbon demand (the policy is designed to minimise the use of coal fired power stations afterall) but it creates shorter-term demand for carbon as profit margins are boosted for gas fired power generation in the NL and across Europe as the other power markets react to higher NL power prices. The law is yet to pass but the reaction of the power markets (NL power for delivery in 2020 up €4 since the announcement on Tuesday 10th October) tell us that most expect the policy to be approved.

Brexit provision is a go but aviation phase IV rules still on hold
Last Wednesday 18th October both the European Parliament (EP) and the Council of Ministers formed a mutual position regarding BREXIT-related and aviation emissions provisions in the EU ETS. The provision AM47 aimed in theory to protect the EU ETS in case of an exit by any of its members from the EU and therefore the system. It was backed by the two EU bodies on Wednesday. However, the agreement reached last week may differ (the final text is awaited but the interim text was appatently adopted with minor changes) from the Parliament’s initial position, first tabled September 13th, in relation to the date UK allowances will be invalidated. While the Parliament and council proposed that UK EUAs were invalidated from the 1st January the new position adopted in conjunction with the Member states does not specify a date from which UK allowances could be invalidated. This results in the fate of UK in the EU ETS being undecided, the final outcome could take several twists yet. As currently drafted the ‘Brexit clause’ will have a major disruptive effect on the EU ETS. See our blog that summarises the impacts.

Aviation (the main, but less exciting, reason for the bill)
The EU Parliament and the Council also agreed to extend the exemption of non-intra-European flights from the EU ETS until 31st December 2023, coinciding with the end of the pilot-phase of ICAO’s MBM mechanism to achieve carbon neutrality from 2020 (CORSIA). However the agreement reached subjects the aviation sector cap to a Linear reduction factor in phase IV (2021-30) that is in line the rest of EU ETS sectors (2.2% a year). However, the proposal to reduce aviation’s free allocation levels down to 50% from 2021, with the rest being auctioned, was not agreed. In an apparent effort to rush through the Brexit clause, the lawmakers agreed to kick this decision, along with whether the revenues from the member states auctions should be spend in climate friendly purposes, into the long grass. Unhelpfully for aircraft operators, both bodies have agreed to set 2019 as the year to finalise their common position.

 

 

 

 

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