EUA premium over CERs grows to 2012 record
The spread between EU allowances (EUAs) and certified emission reduction (CER) certificates has widened to a record over the past week, ICIS data show on Monday, opening up arbitrage opportunities on the carbon market.
The EUA December 2012 benchmark contract gained a premium of €4.80/tonne of CO2 equivalent (tCO2e) over the CER December 2012 contract at Friday's close, according to the data.
This is the largest premium the EUA contract has held over its CER equivalent to date this year. While EUAs have traded at a premium to CERs over the course of this year, the premium was as narrow as €2.65/tCO2e on 4 January. Overall, the EUA Dec '12 premium over the CER Dec '12 contract has averaged €3.72/tCO2e in 2012. Friday's spread was more than €1.00/tCO2e, or roughly 30% greater than the average.
Analysts expect the trend to continue and the spread to widen.
Support for EUAs
The growing premium has been fuelled by a combination of factors that has helped to support EUA prices and depressed CER prices simultaneously.
Since the start of August, the EUA Dec '12 contract has consistently closed above €7.00/ tCO2e, which has been labelled a technical resistance level by some market participants.
While the contract stood at €7.00/tCO2e on 1 August, according to ICIS data, it has gained strength to close as high as €7.70/tCO2e on Friday 17 August. This is a 10% growth in value for the contract.
While August's sessions have been fairly illiquid, as many traders are away from their desks during the summer holiday season, the absence of bearish news and Germany's call for a tighter EU target may have helped to boost prices. In addition, market participants are awaiting the return of EU officials in September to resume the set-aside debate, and as the date nears prices have gathered some upward momentum.
The EU has outlined three scenarios for the set aside, namely delaying sales of 400m, 900m or 1.2bn allowances into the EU carbon market early in the emission trading system (ETS) phase III, which begins next year.
"I think that the EUA price could find support in the planned intervention from the European Commission (the back-loading), but in the case of CERs we cannot find something like this," said Bernadett Papp, carbon analyst at broker Vertis, on Monday.
But tentative proposals published by the Commission have failed to allay uncertainty as to when the promised amendment to the ETS auctioning regulation will be finalised and enacted, as Papp also acknowledged.
"The decision about the back-loading has lots of uncertainties in it. We don't know the exact timing and the exact amounts of it, because stakeholders start to negotiate the plans only in September."
Pressure on CERs
A recent rise in clean development mechanism (CDM) projects, which generate CERs under the Kyoto protocol, has helped to pressure the Dec '12 contract.
"The market is flooded with Kyoto credits, especially because numerous project developers run to get their projects registered before the 31 December 2012 deadline in order that the credits issued are compatible in phase III," Papp said.
CER carbon credits from CDM projects in emerging economies will be ineligible for use in the EU ETS unless the projects are registered with the UN Framework Convention on Climate Change secretariat before the end of this year.
Despite fears of a backlog emerging as the system cannot cope with the high number of new project registrations, project developers' rush to sign up before the deadline has weighed on CER prices as demand for offsets remains low amid the current supply glut within the EU ETS.
While the CER Dec '12 contract opened around the €4.00/tCO2e mark at the beginning of this year, and has averaged €3.74/tCO2e over the course of 2012, the contract's price slumped to €2.85/tCO2e on Wednesday, the lowest level for the contract this year to date, before closing the week at €2.90/tCO2e on Friday, ICIS data show.
Papp said any news that other schemes could admit Kyoto credits would help support such low CER prices, noting Australia, New Zealand, the US and China in particular. However, such a potential move by other markets may take time.
"So in the price of credits I can see more [of] a downwards pressure when approaching the end of the year, while in those of EUAs more [of] a possible upward movement," Papp said.
"And as prices move into opposite directions the spread widens, of course."
This may largely depend on the support the EUA price receives from the outcome of the set-aside debate in coming sessions.
Analyst Matthew Gray of broker Jefferies Bache has previously said the 400m scenario would see prices at €7.00/tCO2e next year, while the 900m scenario would put prices at €10.00/tCO2e and the 1.2bn scenario would boost prices to €13.00/tCO2e.
Isabelle Curien at Deutsche Bank has said hedging requirements could see a delay to the auctioning of 600m tonnes of carbon boost prices to above €15.00/tCO2e early in phase III because of the additional boost from participants' hedging requirements.
The EU is expected to resume the discussions on the set-aside after the summer recess in September. MLDB
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