London: Today’s positive vote in the Climate Change Committee (CCC) on the EU Commission´s proposal to change the Auction Regulation constitutes the final legislative step to implement back-loading.
Back-loading refers to the short-term measure initiated by the EU Commission aiming to curtail the auction volumes by 900m EUAs in the years 2014-2016 and re-insert those at a later stage in the third trading period (2019-2020). Today’s vote by the member state representatives in the CCC approved an amendment to the Auction Regulation specifying the back-loading implementation volume and timing.
This amendment is now subject to a scrutiny period by the EU Parliament and the EU Council, which can both object to the adopted piece of legislation. While the scrutiny period is in theory three months, it is also possible from a procedural perspective to shorten this period. As a result, a fixed starting date for the implementation of back-loading has yet to be set.
From a purely fundamental analysis perspective, the market impact of back-loading should in theory be zero as the market is oversupplied on a cumulative basis by over 2bn EUAs at the end of 2013, mainly from free allocation volumes from the second trading period (2008-2012). As the 900m EUAs will only be temporarily withheld, an efficient market should in principle balance out the gap with the existing oversupply, which is more than enough to offset the back-loaded volumes.
From a timing and trading behaviour-based perspective, ICIS EU ETS analysts expect back-loading to have a significant impact on European carbon prices. The rationale for this is that carbon markets are not efficient and are for the main part not driven by fundamentals but rather by the trading behaviour of market participants and the timing of supply and demand – namely when the short and long carbon positions of compliance players are traded.
The ICIS Timing Impact Model (TIM), which incorporates the trading behaviour of compliance players, shows that the EU carbon market will be temporarily short due to the back-loaded volumes as only a small share of the oversupply built up in the second trading period will be available to offset the withheld auction volumes.
Furthermore, ICIS analysts expect European carbon prices to increase to double-digit figures by 2015 with a steady increase from the start of back-loading onwards.
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