Firms to sell fewer EUAs if EU top court follows opinion

Industrial firms will be even more reluctant to sell EU emission allowances (EUAs) until there is clarity on whether Europe’s top court takes into account a legal opinion that a cut in freely allocated carbon credits in 2013 was legal, analysts say.

Industrial producers in the EU emissions trading system (ETS) receive free EUAs to remain competitive and prevent them from relocating to regions where cost of climate compliance is cheaper.

Juliane Kokott, an advocate general of the Court of Justice of the EU, said on 12 November that the cut applied by the European Commission to the amount of free EUAs demanded by countries still allowed the distribution of too many permits (see EDCM 12 November 2015). Kokott proposed to the court to nullify the correction factor decision and recalculate.

Even though legal opinions are not legally binding, in most cases the EU court tends to follow it.

The EU court is expected to give its final decision within 3-6 months.

Sell fewer allowances

The bellwether December ’15 EUA product was unchanged by the news of the opinion on 12 November. It settled at €8.37/tCO2e, similar to the price range of the week.

However, analysts said the potential of the EU court following this line could trigger firms selling less EUAs looking forward.

“If they have surplus allowances, they might consider twice before selling them,” said an analyst at a trading house.

Another analyst had similar views. Trevor Sikorski, head of natural gas, carbon and coal said “It will make firms even more cautious on how many EUAs they will sell until they get clarity.”

The selling appetite of long industrial companies was already expected to dry up after stricter post-2020 free allocation rules were proposed, which would even act as an incentive for them to start buying, analysts said (see EDCM 21 July 2015).

If the EU court is to nullify the cut, EUAs distributed between 2017-2020 would be affected. This is because there will be no adjustment to the amount of EUAs already handed out in phase III.

It is not clear at the moment the amount of free allowances that would be affected.

According to the analyst, this could be both bearish and bullish for the EUA price.

The fact that firms can keep their current allowances means it could be bearish due to an oversupply of roughly 2bn allowances on the market. But because firms are likely to receive less EUAs in the next allocation handout, this will exude some bullish impact, the analyst said.

Long term impact

Both analysts agreed that-long term price impact from the ruling would be limited.

“The price remains in the increasing trend, [so] the additional positive effect will be marginal,” said the analyst.

Sikorski said in the long-term, the market stability reserve- a buffer to better regulate supply in an oversupplied EU ETS- could be used to counterbalance any potential bullish or bearish impact from the ruling. The reserve will begin in 2019 and absorb 900m 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 IV.

This is in line with the analyst who said that the market stability reserve will guarantee the balance between supply and demand, and most price rises in coming in the long-term will be driven by the reform and not through the allocation of fewer allowances.

Opinion

In 2013, the commission cut allowances by about 12% because the maximum number available to firms was less than the requested amount.

Energy and refinery companies: Api, Dalmine, Dow Benelux, Esso, Lucchini and OMV challenged the case in national courts, which took the case to Europe’s highest rank of justice, the EU court (see EDCM 6 September 2013). saloni.sardana@icis.com