Carbon traders back quicker back-loading option
Most carbon traders prefer the European Commission to finish withholding EU allowances (EUAs) in 2015 as part of a plan to support prices in the EU Emissions Trading System (EU ETS), but, according to analysts, a second option ending in 2016 has more chance of success.
The back-loading proposal – which would postpone to the end of phase III of the EU ETS a portion of the scheduled auction supply – is to be voted by the European Parliament’s plenary on 10 December and subsequently it will need approval by either the Council of the European Union on 13 December or the European Council on 18-20 December to become law.
At that point, the Climate Change Committee (CCC) would need to step in to decide the volumes and timescale of the intervention, a decision then requiring a three-month scrutiny.
Under the original profile, back-loading would have started in 2013 with 400m EUAs withheld in the first 12 months, 300m in 2014 and 200m in 2015. But as the approval process dragged on, the measure can be implemented only starting from 2014. Therefore the Commission outlined a revised timeline with two different options to be discussed at the CCC meeting on 11 December – to remove 400m EUAs in 2014 and 500m in 2015; or to remove 400m in 2014, 300m in 2015 and 200m in 2016.
The second option has also a variant which offers more flexibility concerning the volume of the reduction. It stipulates that if the 2014 reduction cannot be spread over more than a certain number of months, a certain amount of EUAs will be equally shifted to 2015 and 2016.
In both cases, the credits would be put back as 300m in 2019 and 600m in 2020 ( see EDCM 21 November 2013 ).
Four traders polled by ICIS backed the first of the two options, arguing that it’s better if the withdrawal ends as soon as possible.
“I think they should take out permits immediately,” said one trader at a trading house. “I hope they just do 400/500[m EUAs],” said a second source at another trading house. A trader at a utility instead was in favour of the second option as the impact would be more spread out.
With the Commission estimating auction volume at 926m for 2014 and 929m for 2015, the first proposal would remove 43% of 2014 supply and 54% of 2015 supply respectively.
However, the volumes would have to be taken out in less than 12 months, as it would not be possible to implement back-loading at least until April. If final approval shifts farther out and back-loading is implemented in mid-2014, this would mean that in the second half of the year the auction volume would be almost reduced to zero.
“We see [the second] option as the most likely scenario as it spreads the market impact over three years,” said in a note ICIS-owned carbon analytic firm Tschach Solutions.
On the same note, consultancy Nomisma’s carbon analyst Matteo Mazzoni said the 400/300/200m option is the one with higher changes to be adopted, considering the economic recovery still has to materialise and some stakeholders remain against the measure. “It’s also the option that would cause less volatility, which would be appreciated by most participants,” he added.
In any case, back-loading would remove – and just temporarily – just less than half of the estimated 2bn EUAs oversupply from the market.
The carbon curve at the moment was said not to price in any of the two options in particular.
“I don’t think anyone has any expectation at the moment... The proposal has to go [far] to convince the market that the EU is capable of action to fix the oversupply,” said a trader shortly before the Commission outlined the options.
According to Nomisma’s Mazzoni, the run up to the date of the CCC meeting will be key to understand how the market will move. “While industrials are still awaiting for their free permits for 2013, we expect the opening of new positions, especially on Dec ‘14, to increase volatility,” he said in a note on Monday. Silvia Molteni
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