CERs at year's high as carbon swaps interest rises
Expectation that EU allowance (EUA) prices will rise if back-loading receives final approval is making swap trading with certified emissions reductions (CERs) more attractive to carbon market participants. As a result, offsets remain at an annual high and are ignoring a down-tick in EUAs, sources say.
The benchmark CER front year fluctuated in the €0.25-0.45/tonne CO2 equivalent (tCO2e) range in the first four months of this year, ICIS data shows, as a growing oversupply combined with low demand pushed the contract to all-time lows.
With the start of May, a speculative wave of buying activity boosted EUA prices in the run-up to two back-loading votes, first in the European parliament's environment committee on 19 June and then in the parliament's plenary session on 3 July. On the back of the buying, the EUA 2013 value rose by 52% to €4.70/tCO2e in the period 1 May-3 July.
Strength fed through to CERs, with the front-year price increasing by 83% to €0.55/tCO2e - its highest level since December 2012 - in the same period.
Then, after the European parliament's yes vote last week, EUA prices ticked down, with the benchmark being assessed at €4.25/tCO2 on Monday.
The post-vote bearishness was the result of a combination of several factors, including the realisation that a final approval of back-loading, if any, will not be given before the end of the year and position-closing ahead of the holidays, traders said.
But CERs have not mirrored that downward movement and have instead remained flat at their annual high (see graph).
This is because the yes vote, despite being far from final approval, opened expectations that the EU carbon prices could increase again in the future, sources said.
As a consequence, they said, buying cheaper CERs and selling the more expensive EUAs would become more attractive. "More people are realising that there's still money in CERs," one trader said on Monday.
More upside potential?
Gains for offset credits, however, remain limited because their use for compliance in the EU's Emissions Trading System (ETS) is capped, a second trader said.
"The problem is the cap," the trader said. "I think [the CER front-year price] won't go above €1.00/tCO2e."
After record use of offsets for compliance in 2012, the European Commission recently proposed setting the limits for their use in phase III of the ETS as low as current legislation allows, in a bid to limit the oversupply problem that is plaguing the scheme (see EDCM 6 June 2013).
The proposal will enter into force subject to a positive opinion by the climate change committee - which is due to meet on Wednesday - and after three months of scrutiny by the European parliament and the European Council.
Additional support, however, might come when free EUA allocations are handed to industrial companies.
This is something that the commission originally scheduled for February, but that remains outstanding after a series of delays. The latest news on the issue from the Dutch emissions authority indicated on Monday that the allocation will not be made before August at the earliest (see EDCM 8 July 2013).
The uncertainty surrounding free allocation has led industrials - the potential sellers in the ETS because of the significant length in their sector - to hold on to their EUA surpluses until the EU confirms the figures for the national implementation measures (NIMs), analysts say.
"When industrials receive free EUAs, they might sell - at least the quota that they'll be able to cover with offsets, which they'll buy," the second trader said.
Their actions could therefore have a bearish effect on EUAs and an opposite bullish effect on CERs.
But, because CER/EUA swaps are usually made very slowly by industrials, the source added that, as a result, it might be difficult to see steep movements in CER prices.
"The effect on more-liquid EUAs might prevail," the source said. Silvia Molteni
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