Germany’s EU-wide carbon floor proposal ‘extremely unlikely’

A German proposal for an EU-wide minimum carbon price is unlikely to materialise, energy traders have said.

And reports that the German environment ministry was considering the proposal were not the underlying driver behind a rally on European energy markets on Thursday, power traders said.

It was instead caused by bullish signals from commodity markets coinciding with one another, a trader at a European energy company said. “On Friday prices might decline on profit taking,” he added.

According to reports based on a leaked document widely circulated by some media outlets on Wednesday, the environment ministry is contemplating the inclusion of a paragraph in a draft of its Climate Action Plan 2050, saying the government would consider the introduction of a Europe-wide minimum carbon price.

“The draft published is not the actual state of the plan,” a spokesman for the ministry said on Thursday. As the draft has not yet been signed by the environment minister Barbara Hendricks, the ministry cannot comment on it, he said.

The ministry expects to send the draft plan to other ministries for approval in the next few days or weeks and expects the government to approve it by mid-2016.

Likelihood

“I don’t see it happening,” a power trader at a European energy company said about the possibility of Germany proposing an EU carbon floor. The government would not make such a proposal due to opposition from the energy industry, he asserted.

A trader at another European energy company said the possibility of such a proposal is “extremely limited”.

He said: “With eighteen months until the [general] elections, I would love to see how they will sell it to the energy industry,” adding it “would cripple the manufacturing industry too”.

Considering the draft does not yet have any approval from the economic affairs minister, it is likely it would at least be watered down, ICIS analyst Jan Ahrens said.

The managing director of a German consultancy, who asked not to be named, said: “If it happens, then you should see further movement in that direction [towards a firm proposal] before the summer break, sometime in July. This is because it would be difficult to pass proposals in the 12 months preceding the general elections, which are due in autumn 2017, he added.

The backing of Rainer Baake, the state secretary at the economic affairs ministry, would make the proposal more likely, he said.

According to an expert at a German consultancy, which has conducted studies for the economic affairs ministry, Baake “is likely to join the activities”, meaning he would be involved in any discussions that preceded a proposal. But, he added: “I am not sure the industrial section within the ministry is ready to join.” Several experts working at both ministries have said a carbon floor would help the government reach its climate targets, the consultant said.

The government said in March in a parliamentary document it has “fundamental reservations” about a national carbon floor while “discussions and proposals on this at a European level will be followed and scrutinised”.

Price impact?

A carbon floor would have a considerably bullish impact on wholesale power prices as it would force some coal-fired generation off the market while heaping financial penalties on those fossil-fuelled plants that remained operational – costs that would need to be passed down the supply chain.

And forward-curve prices at large European electricity markets as well as gas, coal and carbon futures, made strong gains on Thursday. The German Cal ’17 Baseload traded at €25.45/MWh in the afternoon, €1.075/MWh above Wednesday’s close, before falling back close to €25.00/MWh.

But the clash with the German proposal appears to have been coincidental, with most traders citing fuel markets as drivers.

It was caused by some bullish signals from commodity markets coinciding, the trader at a European energy company said, forecasting a wave of profit-taking on Friday.

“A series of things built up like last week,” a second trader said. This was a reference to European energy futures which hiked up after the unveiling of the French government’s plan to introduce a national carbon floor from 2017, which coincided with some other bullish factors and caused a wave of short-covering.

Germany’s leaked draft climate plan should not impact Cal ‘17 prices because it it likely to concern the years after 2020, he said. The initial bullish impetus seemed to have come from gas markets on Thursday, he added.

It would be very strange if the draft would be the reason for Thursday’s gains, ICIS analyst Ahrens also concluded. There is really not a lot of substance in the [leaked] text,“ he said.

Low liquidity caused by Thursday’s public holiday in several European countries probably contributed to the bullish hikes as it made exiting short positions more difficult, traders agreed. laura.raus@icis.com