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Coal's clean dark spreads boosted as key EU vote crushes carbon market

16 Apr 2013 19:26:32 | csd

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German clean dark spreads were boosted on Tuesday afternoon as the European parliament rejected a key proposal designed to prop up the carbon market in the short term.

Carbon prices crashed as a result. By midday London time, the December 2013 benchmark EU allowance (EUA) had fallen to €3.23/tonne of CO2 equivalent (tCO2e), 33% lower than Monday's €4.80/tCO2e close.

Germany's front year was also looking at an eight-year low, according to the level at which it was trading in the afternoon.

Coal traders said utilities had stepped in after the vote to hedge clean dark spreads, as power and carbon prices crashed.

MEPs were voting on the European Commission's "back-loading" proposal, under which 900m EU emissions allowances (EUAs) would have been temporarily removed from the EU's emissions trading system (ETS) and loaded back in later on.

The vote was a major blow to the ETS and sparked fears that climate and energy policy will renationalise across the bloc.

Back to committee

The rejection did not kill the back-loading idea off, however. It will go back to parliament's environment committee, but it could be years before it emerges again, if at all.

German power has had almost a perfect correlation with the ETS in the run-up to the vote and, if carbon prices continue to fall, that market could turn more bearish.

Carbon market players expect the no-vote to continue to crush prices to even lower levels, testing former low €2.81/tCO2e and possibly settling at about €1.50/tCO2e in the next few sessions. In theory, even stronger clean dark spreads could boost coal-fired generation in Europe, but coal burn cannot go much higher than its current levels.

Back-loading was only a temporary measure to fix the carbon market oversupply. The commission has started looking at more permanent structural changes but they will involve even more complicated proposals and a fundamental change to climate legislation.

Some EU member states will be hostile to structural change too. Any change to "fix" the ETS will now be some way off, while market participants and EU officials think national fragmentation could emerge in the interim instead. Fionn O'Raghallaigh

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