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Market optimism on ENVI vote supports EUA prices

11 Feb 2013 18:22:54 | edcm

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Optimism that the European Parliament's Environment Committee (ENVI) will vote in favour of the back-loading proposal is supporting current carbon prices, traders and analysts agree, but the boost for EU allowances (EUAs) is expected to be short-lived.

Since the start of 2013, news on whether the European Commission's proposal to back-load some 900m EUAs will be approved or not has almost exclusively driven the benchmark EUA 2013 contract. If it goes ahead, the back-loading would help address the oversupply in phase III (2013-2020) of the bloc's emission trading system (EU ETS)

In the first half of January, member states' disagreement on the matter exerted a bearish pressure on EUAs, driving the benchmark to €4.75/tonnes of CO2 equivalent (tCO2e) on 23 January, down from €6.70/tCO2e on 2 January (see graph).

In the last week of January, the contract extended losses to an all-time low of €3.45/tCO2e. This was in response to the European Parliament's industry, research and energy committee (ITRE) vote against the proposal on 24 January (see EDCM 24 January 2012). However, the contract has started a gradual recovery, rising to €4.45/tCO2e at the close at the end of Week 6 2013.

While a range of factors has supported the uptick, including a stronger energy complex, traders agree that the gradual increase indicates that the market is factoring in the positive outcome of another vote on the proposal when the (ENVI) meets on 19 February.

Chance of the next vote

Market participants and experts agreed there is optimism regarding the vote, which has boosted prices to date this month.

"I think prices fell too much after the vote of the ITRE committee. Thus, the increase seen afterwards was due both to a correction upwards, after the too-big decline, [and] the expectations of a positive outcome of the vote in the ENVI committee," said Ingo Tschach, managing director of German carbon consultancy Tschach Solutions.

"I expect the vote to succeed, as it was the European Parliament itself that requested to the Commission to submit a back-loading proposal," Tschach added.

"Chances the proposal will be supported by the ENVI committee members are increasing," Matteo Mazzoni, carbon analyst at Italian energy consultancy Nomisma, said in a note.

Last week a "compromise" amendment on the proposal emerged (see EDCM 7 February 2013).

"The proposal might be changed to gain a larger consensus both within the ENVI committee and in the subsequent plenary.[...] Considering the opposition it had within the ITRE, the chances that the back-loading would incur a red light from the plenary [without the compromise amendment] were very high."

If the amendment is passed, it is likely the proposal will be passed, he said.

Outlook

With prices said to be already at least partly reflecting a positive vote outcome, the forecast for week 7 is flat to bullish.

"[This week], we should not see any surprises on the market," Mazzoni said, adding that "carbon prices are likely to continue to correct upwards".

"The ENVI vote passing [the [proposal] should be priced in leading up to the 19th, whereby EUAs will likely be sold-off after the result is made public," Jefferies Bache's carbon analyst Matthew Gray said in a note on Monday.

A carbon trader echoed the view, "I can easily imagine prices continuing the slow increase until 19 February e_SLps But I think they will fall anyway after the vote, as if it will succeed, there will be some profit locking."

Tschach added that if the vote will succeed, "prices will probably increase in the very short term, but then get back to their bearish trend".

As the market expects a positive outcome, prices will collapse if the vote disappoints and the proposal is opposed.

"If the ENVI vote fails then back-loading will be dead in the water and EUA prices will trade within a €1-5[/tCO2e] range until EU officials can garner political support for meaningful reform," Gray said. Silvia Molteni

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