EUAA to EUA discount sought on aviation auction restart

EU aviation emissions allowances (EUAA) are due to be auctioned from 3 September after around a two-year hiatus, with market participants expecting prices to be at a slight discount to standard European carbon permits.

Airlines making intra-EU flights are required to take part in the EU emissions trading system (ETS) and the sector has its own type of carbon permits which can be handed in to demonstrate compliance.

EUAAs can be expected to be priced in the range of EUAs – given both types of permits can be used interchangeably by airlines for compliance – but at a slight discount.

“The auction is likely to clear at a good discount of €0.25-0.50/tCO2e compared to EUA prices,” a research note on Thursday from analysts ICIS Tschach Solutions said.

“If speculators buy a significant share of EUAAs, they will sell EUAs to lock in the €0.25-0.50 spread,” the note added.

Airline participants could aim to put in bids as low as possible to test the market.

“Airlines could be looking for a bargain,” Nick Soeteman, an emissions trader from Amsterdam Capital Trading said on Thursday.

But the spread may change going forward.

“I think there is a trend that the spread will narrow,” an analyst said on Wednesday.

The discount of the EUAA to EUA settlement prices has narrowed from €0.60/tCO2e at the start of 2014 to €0.22/tCO2e on Tuesday, according to data from the chief secondary market trading platform Intercontinental Exchange.

As soon as the cost of EUAAs reaches very near the EUA price, airlines may as well buy standard EUAs instead because they are not just for use by the aviation sector and can therefore be sold on to any market player.

EUAA activity could rise

Brussels has twice tried to expand the geographical scope for aviation in the EU ETS, but failed on both counts following international and industry pressure ( see EDCM 3 April 2014 ).

The policy uncertainty placed on hold compliance needs for aircraft operators for 2013 and 2014 until 30 April 2015 and EUAA auctions were postponed.

However, activity around EUAAs could pick up next week once the auctions restart and airlines know how many free carbon permits they will get from government.

“Most of the airlines are waiting for the numbers,” the analyst said. The EU requires each country to publish by 1 September the number of free allowances each airline operator should receive.

It was announced earlier this week that 6.6m free permits will be handed out to airlines in the UK each year, while 5.2m will be available for German operators ( see EDCM 28 August 2014 ).

Different airlines are likely to have different behaviour in the carbon market.

“I think the big airlines do their hedging regularly”, the analyst said

The auctions are likely to attract only airlines with a more sophisticated approach to their carbon portfolio or speculators, ICIS Tschach Solutions said. Ben Lee