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Carbon prices drop as 30m EUAs are withheld until phase III

04 Dec 2012 18:57:54 | edcm

More than 30m EU allowances (EUAs) have been withheld from the market in the early phase III common auctions, platform operator EEX said late on Monday. The volume will be offered only in phase III (2013-2020) of the EU's carbon emissions trading system (ETS).

As the market is already heavily oversupplied, the news could depress the already low EUA prices even further.

The 30.3m EUAs that have been held back will now be distributed evenly in 2013 auctions, according to the platform's final auction calendar, published on Tuesday. The actual calendar for next year, showing the number and timing of the now larger auctions, has yet to be published.

Meanwhile, EEX said on Tuesday that Denmark has been admitted to the common auction platform.

The great price depression

The news of an even larger supply of allowances coming to the market in phase III weighed down carbon further early on Tuesday, market sources said. On the day, the EU auctioned off 5.3m allowances.

In one of three briefing notes published on Tuesday, Jeffries Bache's carbon analyst, Matthew Gray, said: "The early phase III auctions are beginning to weigh on the market. Disturbingly, we may be seeing the emergence of a bearish trend. Trading before early phase III auctions has been subdued, as utilities get ready to bid and speculators wait for the result."

He said the commodity had "completely decoupled" from the European energy complex and economic indicators, which traditionally drive EUA prices in particular.

Gray said the low carbon price has created a greater incentive for utilities to burn coal rather than gas as temperatures fall, creating a perverse incentive for emissions to rise.

"Unfortunately, the back of the EU ETS has been broken by the great recession," he said. "Without intervention, German utilities will happily burn coal and the EU ETS will play no role in Europe's low carbon transition."

In a second briefing note, Matteo Mazzoni, NE Nomisma Energia carbon analyst, said postponing the back-loading proposal vote (see EDCM 30 November 2012), which saw carbon prices collapse on Friday, would continue to weigh on prices for a while.

And, in a third note, Mark Lewis, head of commodities research at Deutsche Bank, said: "The market's reaction to the news that the vote on back-end loading has been postponed to an undetermined date was understandably negative and we think EUA prices are now likely to remain under pressure unless and until there is clarity on the timing of a [Climate Change Commitee] vote."

Lewis said the bank expects EUA prompt prices to trade in a range of €5-7.00/tonne of carbon dioxide equivalent (tCO2e), down from €6-8.00/tCO2e, but that the range could fall below €5.00/tCO2e if the back-loading vote keeps being delayed or if the bloc's economic outlook worsens.

Deutsche Bank said that, at best, the back-loading will be voted on in February 2013, while, at worst, it could be pushed to June 2013, which could arise if member states fail to agree on the proposal, the risk of which the bank regards as slim.

Offsets

Mazzoni said the EUA prices' decline would narrow their premium to CER prices but that CER prices have also been hit by regulatory uncertainty, as the failure to reach agreement by the EU and its negotiating partners at Doha has depressed offset values. "If Doha ends with a Kyoto2 and full bankability of [Assigned Amount Units - AAUs], it's probably going to be game over," he said.

Countries are running out of time to deal with the AAU surplus (see separate story).

The next EU phase III auction is scheduled for 18 December, when 5.6m EUAs will be offered to the market. MLDB

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