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Life-or-death back-loading vote outcome too tight to call

15 Apr 2013 17:00:48 | edcm

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On the eve before the European Parliament votes on a measure that some say is crucial for the future of the EU emissions trading system (ETS), the outcome is still considered highly uncertain.

Members of the European Parliament (MEPs) will vote on Tuesday to decide whether the European Commission has the political power to hold back EU allowances (EUAs) in phase III (2013-2020). Back-loading allowances would be a temporary fix to the market's oversupply, while member states negotiate structural reforms.

Market expectations

Analysts and market participants have found the vote outcome too close to call.

"Either the vote will fail or it will pass by a close margin," said in a note Jefferies Bache's carbon analyst Matthew Gray.

The largest party in the Parliament, the European People Party (EPP), reiterated last week that it opposes the proposal .

This has led some experts to be pessimistic with consultancy Nomisma's carbon analyst Matteo Mazzoni, for instance, saying he is highly sceptical the vote will succeed.

Stakeholder consensus is that a negative vote would end the future of back-loading, at least for the coming years, while a positive vote would still not guarantee its success.

"The EPP is already seeking to water down the proposal if it passes. This could see the volume and timing being altered," Gray said.

The current text proposes holding back 900m EUAs between 2013-2015, and then reload them in 2019-2020.

Instead of voting on this volume, MEPs will decide on Tuesday whether to give a mandate for trilogue negotiations, which are considered important because they would speed up legislative approval.

Success

If the majority of MEPs decide to back the proposal, analysts predict it will boost prices in the short term before they soften again in the medium term. This year, the EUA December 2013 benchmark contract has closed at an average price below the five-euro mark.

"If the vote passes then we expect the price to quickly test the yearly intra-day high of €6.84/[tCO2e (tonne of CO2 equivalent)]. The price will likely push to €7.00/tCO2e and perhaps beyond, but sooner or later reality will set in and the price will decline towards our average front-year EUA forecast of €5.00/tCO2e," Gray said.

The expected price movement is based on supply still continuing to come onto the market, as almost daily phase III auctions will continue as the Parliament's vote is not the final step in temporarily removing allowances from the system.

"[Chairman of the European Parliament's Environment Committee] Matthias Groote is just winning some time for the structural measures. Back-loading won't save the ETS but it is a good measure to help the ETS," one trader said.

Only a positive vote outcome could likely push prices above €6/tCO2e, according to Unicredit.

Failure

Price forecast are strongly bearish in the event that MEPs oppose the proposal.

"If the vote fails then we expect the price to quickly test the all-time low of €2.81/tCO2e and then descend towards €1.50/tCO2e over the next couple of days," Gray said. This would mean that the market was "essentially finished until further notice" and reduce the ETS to be more akin to a tax than a market, he added.

Vertis carbon analyst Bernadett Papp echoed the €2.81/tCO2e figure as a historic low level for EUA prices that a no-vote would crush.

Such a scenario would prompt speculators and industrials to exit the market, which will only leave utilities in the ETS who will continue to cover power hedges.

A second trader said: "Without the support of the back-loading proposal we risk to have prices around one or two euro."

According to Unicredit, prices would head to between €3.00-4.00/tCO2e in case of "a negative surprise" - for instance, if the process faces further delays or the proposal is watered down.

Mazzoni said that prices would likely drop below €3.45/tCO2e if Parliament rejects the proposal.

Papp also pointed out that if the current text fails, the market is unlikely to see another one being put on the table before next year's Parliament elections, meaning even temporary relief for the oversupplied market would shift out of reach for years. Silvia Molteni and Marie-Louise Du Bois

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