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ETS set to continue despite price collapse - market

25 Jan 2013 20:39:00 | edcm


Market participants have labelled Thursday's price collapse, on the back of a vote against the back-loading proposal, as exaggerated, with the general consensus being that the Emissions Trading System (ETS) will continue as the EU's flagship climate policy even if prices remain low due to delayed regulatory action.

Industry groups such as the Climate Markets & Investment Association (CMIA) and the International Emission Trading Association (IETA) expressed disappointment over the vote by the EU's Industry Research and Energy Committee (ITRE) against the back-loading proposal on Thursday (see EDCM 24 January 2013).

CMIA Executive Director Miles Austin said he hoped the environment committee would vote in favour of the proposal on 19 February, which was echoed by IETA's President and CEO, Dirk Forrister.

One source said that Thursday had seen some exceptionally high volume on the back of speculative trading, although ITRE's decision had not been formal.

Another said that the low price was an "overreaction", as the quick rebound after the crash showed, while a third source said the market had "panicked".

The latter added some big players had supported the price by buying allowances cheaply. But once prices dropped below €4 the bearish sentiment accelerated, he said.

ETS future

The first source said the dwindling prices were unlikely to stir policy markers into scrapping the EU ETS.

"No, they won't scrap the ETS. It would be too expensive to dismantle a market that has already operated for seven years," he said.

Removing the ETS would also raise the spectre of national or regional schemes, he added, which would be too inefficient and expensive to run across Europe.

Major changes to the ETS will only happen after 2015, according to the source. In the interim, the back-loading proposal would be difficult to pass. "I hope it happens, but nobody is willing to implement it," he said.

A fourth source said last week's failed auction showed traders to be "nervous on carbon" because of regulatory uncertainty. He said this had created a "herd instinct" on the market, as a lower bid saw others follow.

Despite uncertainty, the fourth source echoed others by saying the EU would not abolish the system despite the low price, but that EUAs would hover around the €1.00-2.00/tCO2e mark instead.

Introducing a tax would raise the question about how money collected should be collected and spent.

"It would be too inefficient and would not solve the problems that the ETS faces," he said.

Jefferies Bache analyst Matthew Gray agreed with the views. "I don't think [scrapping the ETS is] a legitimate risk over the near term. The EU ETS is primary legislation."

He added that the fact that the EU ETS was a politically created market, rather than one arising from demand and supply of an existing commodity, meant the EU ETS would always face challenges as participants continuously influenced market design.

A tax would face some of the same problems as the ETS, and be as difficult as structural reforms to the existing system, as well as adding additional compliance costs to the system, Gray added. MLDB/SM

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