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Market nerves over back-loading erode EUA premium despite compliance date nearing

11 Apr 2013 19:04:00 | edcm

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Uncertainty over the back-loading proposal has helped narrow the premium that carbon allowances hold over offsets, as EU allowance (EUA) prices have fallen despite there being only just over two weeks left for compliance buying.

The spread between the benchmark EUA and CER contracts has tightened sharply in recent sessions, as uncertainty over the upcoming back-loading vote is weighing on EUA prices.

While the EUA December 2013 premium over the equivalent CER price has averaged €4.40/tCO2e since the start of this year, it started rising steadily since 20 March, ICIS data shows.

Analysts and traders put this down to compliance buying, as industrials were reported to have sold length in advance when carbon prices were higher and are now buying them back at a cheaper price before the April 30 deadline (see EDCM 4 April 2013).

By 8 April, the premium had risen to €4.80/tCO2e, the highest since 22 February, when it closed at €4.85/tCO2e. At the time, a run up to a key vote on back-loading by the European Parliament's environment committee caused a wave of speculative buying which pushed up the EU price (see EDCM 22 February 2013).

But the traditional EUA premium was eroded rapidly this week when a member of the European Parliament's comments suggested that a large number of votes will be cast against the back-loading proposal next week (see EDCM 9 April 2013).

Since the start of the week, the EUA premium has fallen 16% to close at €4.05/tCO2e on Wednesday.

Previous years

The EUA benchmark premium over the equivalent CER contract has become weaker over the course of phase II, according to ICIS data. This may be owing to offset prices collapsing and oversupply as well as allowance prices being depressed by the accumulation of allowances while any measures to remedy it remain outstanding.

In 2009, the premium rose sharply over the course of March into mid-April. After closing at €0.90/tCO2e on 20 February, EUA price rises pushed this to €3.30/tCO2e by 14 April.

In 2010, the trend was lesser, as the premium rose from €1.40/tCO2e at the start of March to €1.60/tCO2e by 12 April.

Similarly, in 2011, the premium rose from €3.50/tCO2e on 20 February to €3.90/tCO2e on 11 April. At the time, CER prices still represented around 76.71% of EUA value.

Last year was the first year that the reverse trend set in, driven by a strengthening of CER prices in the run-up to compliance. This could be because operators chose to use the relatively cheaper offsets, instead of allowances, for surrender.

By 10 April 2012, the CER benchmark contract had fallen to a close of to €3.75/tCO2e, only representing around 55.55% of the equivalent EUA contract value of €6.75/tCO2e.

On Wednesday, the EUA '13 closed at €4.45/tCO2e, while the CER '13 was at €0.40/tCO2e. This means the CER price has fallen to represent as little as 9% of the EUA value. Marie-Louise du Bois

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