Weekly carbon trading update – 15th January 2018

Market developments:

  • Carbon ends the week slightly higher at €7.87
  • Another rangebound week as carbon fails to break its price-range shackles
  • Monday features largest downward move, falling to a low of €7.60
  • EU Commission confirms 2018 UK issued allowances will be valid
  • Germany re-affirms its climate pledges
  • The Daily Market update is back for those looking to purchase allowances for year-end compliance requirements. To receive it please click here.
  • Redshaw Advisors Group Training Day – let us know if you are interested. See page 3 for more information.

 

EU Allowance Auction Overview:

  • Auction volume increases to ~20.5Mt this week, up from ~17Mt last week
  • January brings a total of ~66.5Mt to market
  • See auction timetable below

 


 

EUA PRICE ACTION

Carbon continued to defy largely bearish fundamentals last week as prices ended the week 9c higher in another rangebound week with muted trade volumes. Once again, the first day of the week featured the main price move. Prices tumbled to €7.60, the low of the week, as the auctions returned and reports emerged suggesting Germany would abandon its climate goals (see ‘Other News’ below for more detail). However, in a repeat of last week, buyers stepped in to provide support and carbon returned to the recent middle ground around €7.80. Much like the moves lower, subsequent attempts to re-test €8 quickly ran out of steam. The return of the auctions appeared to have little impact on the market as the malaise continued, auction demand was relatively stable. The overall picture for carbon remained bleak for most of the week as power prices and the corresponding generation spreads tumbled with only a strong EUR/USD rate curtailing the falls. Additionally, with above average temperatures across much of Europe, the strength carbon continues to exhibit suggests that either the Market Stability Reserve (MSR) may already be having an impact on demand or the market is finely balanced in weeks with reduced auction volume. Price Impact: the return of the auctions at lower volume levels (due to UK auctions being suspended until February) failed to make a difference, presumably due to lower hedging demand. However, sideways trading will not continue forever…

WEEK AHEAD

Very little has changed from last week. We go into the week with a bearish outlook based on the fundamentals. With one more auction this week, supply increases to more than 20Mt spread across five auctions. The Cal 19, 20 and 21 German power prices have tumbled 4%, 7% and 6% respectively since the beginning of the year with a material impact on the generation spreads. The strong EUR/USD prevented further falls. If power prices continue to fall it is unlikely carbon will remain immune. However, if carbon can come through this week unscathed, then a break back above €8 will come sharply into focus as shorts are forced to close out or reverse positions.

 


OTHER NEWS

EU Commission confirms 2018 UK issued EUAs will be eligible for compliance
The European Commission has confirmed that all EUAs issued by the UK in 2018 will be eligible for compliance obligations in the EU ETS. The confirmation follows the amendment of UK law to bring forward the 2018 verification and compliance dates for its installations to 11th and 15th March, 2019 respectively. This was in response to moves in the EU to invalidate UK issued allowances in light of Brexit to ‘protect the environmental integrity of the EU ETS’. This would have been done by adding a country identifier to UK issued allowances. To the relief of market participants all 2018 allowances will now be issued without a country identifier.

UK Government serious about environment.
Prime Minister Theresa May said last week her government is serious about improving the environment in the new 25-year environmental plan. The strategy was praised for its ambition, however it contained no new climate or air quality measures. May reiterated her commitment to delivering a ‘green Brexit’.

Germany re-affirms its commitment to climate pledges
Following reports Germany was set to abandon its climate pledges, the country’s two largest parties have agreed to commit to the current 2020, 2030 and 2050 climate targets as part of initial talks to form a new coalition government. Both the CDU/CSU and the SPD agreed to take action to close the gap to the 2020 target with most observers calculating current policies are likely to reduce emissions by 32%, 8% shy of the target. The 2030 and 2050 targets of 55% and 95% will remain unchanged.
Due to their position as a global leader on climate action, the initial reports suggesting Germany would abandon its goals were met with widespread condemnation, but the fears look to have been alleviated by the latest talks that look set to see the CDU/CSU and SPD forming a coalition once more.

 

 

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