Market stability reform vote to spark little speculation

Saloni Sardana

26-Jun-2015

A vote on 6 July by the EU parliament on the market stability reform is unlikely to spark significant speculative buying interest in the EU carbon market, participants have said.

Market participants had initially expected more speculative buying ahead of the vote similar to trends during the early stages of development of the reform.

The measure aims to introduce a buffer to absorb or release auction volumes depending on surplus levels, giving the supply side of the emissions trading system (ETS) more flexibility. It was agreed the reserve should start in 2019 and it should absorb 900m EU allowances (EUAs) whose auctioning has been postponed to the end of the phase as part of back-loading and permits that would have remained unallocated by the end of phase III (see EDCM 26 May).

Up until now, the European Commission, EU Council and the environment committee of the European Parliament have provisionally agreed on the market stability reform.

The final step will for the reform to become law will be for EU ministers to agree to the plan. A spokesman for the Latvian presidency said that the final rubber-stamping of the reform is likely to take place in mid-September, assuming a positive vote on 6 July by parliament.

Opportunity to speculate

The reform has provided opportunities for speculators to take short or long positions based on expected outcomes of votes on the reserve. Traders had banked upon the vote as being one of the final opportunities to speculate on the market stability reserve decision making process.

The vote could have provided impetus for EUAs to break out of the current €7.50/tCO2e price, which EUAs have hovered around for over three weeks.

But market participants now said that expectations of the parliament voting in favour of the reform have already been priced in EUA prices.

“People are becoming more and more short-term in their outlooks,” said a carbon trader at a UK based trading-house last month. Speculation is not happening as far away from the actual event compared to earlier, he said.

However, another trader at a trading-house said that he would buy EUAs one week ahead of the vote. There will be some ‘buy the rumour, sell the fact’ activity, or take long positions hoping to make a profit, he said.

A UK trader at a trading-house said that EUA prices had more upside potential if the resistance level of €7.65/t CO2e is breached.

Although traders expect the reserve to be approved by the full parliament, market participants will be mindful that parliament previously rejected back-loading at a similar stage – before it was eventually passed. The initial rejection caused EUA prices to plummet by 45% in two sessions (see EDCM 16 April 2013).

Phase IV draft

The commission intends to publish a proposal on phase IV of the EU ETS by 15 July. Unallocated allowances and free allocation are likely to be key topics under discussion. Industrial firms receive EUAs to mitigate the risk of carbon leakage, or where industrials migrate to regions where cost of carbon is significantly cheaper.

Traders agreed that news of unallocated allowances and free allocation rules in phase VI proposal is more likely to ramp up speculative activity than the market stability reform vote on 6 July.

The market may test €7.64/tCO2e, May’s highest price, and after that €7.75/tCO2e, the analyst said.

“We will only be able to breach €7.75/tCO2e level when the commission puts forward the [phase IV] proposal,” she said. saloni.sardana@icis.com

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