Carbon market liquidity holds up, despite risks
Liquidity is holding up in the forward carbon market, despite a freeze on spot trading and the risk of buying stolen EU allowances (EUAs).
Traded volumes on the IntercontinentalExchange (ICE) for EUA futures averaged 12.5m tonnes of CO2 equivalent (tCO2e)/day last week. That compares with 10.4m tCO2e/day in the week beginning 10 January, before a hacker attack led to an EU-wide registry suspension (see EDCM 20 January 2010).
Liability risk
This implies that most traders continue to do business with each other, despite concerns over the liability attached to re-trading stolen EUAs. In some - but not all - EU countries, this is a crime in itself, and counterparties that buy stolen allowances, even in good faith, stand the risk of losing them. Around 3m EUAs were stolen in January.
Some participants say they now just want to trade with compliance operators in a bid to cut this risk. Barclays Capital is one example.
But other traders say this is not a widespread approach. Even though most are wary of the risks linked to liability, this is not enough to stop them trading with their usual counterparties, they say.
This risk is smaller in the futures market, anyway. A company buying forward will usually not take delivery of the EUA until December this year at the earliest. By that time, traders expect the stolen EUAs to have been tracked down and at least frozen - so they should not end up in their accounts.
In addition, many of the stolen EUAs are already frozen in various registry accounts. The longer the suspension lasts, the bigger the chance of all of them being quarantined.
"People might stay away from the March [2010] contracts, but for December expiries, volumes are pretty robust," one source said.
No spot means fewer sellers
But liability risk is not the only outcome of the hacking attack that could curb liquidity.
Several traders point out that no spot market means that banks are likely to sell lower volumes forward. It is a common strategy for banks to buy on the spot from natural industrial sellers, and sell on the forward market. This is now not possible.
But any drop in liquidity due to banks becoming less active will probably be offset by utilities trading higher carbon volumes in the first half of the year, in order to hedge their forward electricity sales, according to trading sources. Even though power companies come to the market to hedge at different times, and there is no clear hedging season, the pattern is for this kind of buying to pick up in spring, they say.
So no spot market is likely to mean fewer sellers - but not fewer buyers. That would imply a shift in the supply/demand balance, rather than lower liquidity. Prices have so far trended upwards since mid-January - although whether this is due to the spot shutdown or bullish German power prices is up for debate. IS
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24 May 2012 21:02
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EDEM,ESGM
24 May 2012 21:02
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EDEM,ESGM
