London: The Californian emissions trading scheme is fundamentally oversupplied. ICIS expect total capped emissions from 2013-2020 to be some 40 million tons lower than the available allowances. If the offset supply is further added, the oversupply is further increased. What does this mean for prices?
The Californian system is not the first market that is oversupplied with allowances: The US east coast market RGGI, as well as the world’s largest system, the European Union Emissions Trading System (EU ETS), have so far seen in all periods fewer emissions than available allowances. However, all did not trade at the price floor initially. In fact, prices deviated considerably from the fundamentally fair price – the floor price.
If the fundamental balance is not a good indicator of price developments in the near term, what is a good indicator?
ICIS has developed a model that calculates the supply and demand in the market. The difference to the fundamental balance is the application of behavior: How and when are companies managing their carbon allowance positions? By combining the fundamental data and behavioral patterns, ICIS’s Timing Impact Model (TIM) forecasts the market balance over time. This model approach has an excellent proven track record in the EU ETS and is now available for the Californian market.
The TIM identifies periods in which the demand in the market exceeds the supply available. In particular, the model expects that in 2014 the demand for Californian carbon allowances will rise as companies will hedge their needs for 2015 and beyond. This demand cannot be covered with enough early auction volume, resulting in a temporary rise of prices during 2014. However, with the start of higher auctioning in 2015, the prices are expected to gradually decline and eventually trade at the floor price by the end of 2015. Even though such development seems counterintuitive, a look at price developments at other emission trading schemes suggests that such trajectory is in the nature of cap and trade systems.
For further information please contact:
Jacqueline Savory 0207 9111977
Tschach Solution’s Acquisition
Founded in 2010 and based in Karlsruhe, Germany, Tschach has a strong industry reputation in carbon market analysis. Tschach’s core offering is its extensive, high-quality data and estimates on all relevant areas of emissions trading, power markets and clean development mechanisms in the EU in relation to buying and selling carbon credits.
Standing out from its competitors, Tschach uses a unique Timing Impact Model in its data which shows the historical and forecasted behaviour of market participants’ impacts on carbon credit prices.
ICIS is the world's largest petrochemical market information provider and has fast-growing energy and fertilizer divisions. Our aim is to give companies in global commodities markets a competitive advantage by delivering trusted pricing data, high-value news, analysis and independent consulting, enabling our customers to make better-informed trading and planning decisions. We have more than 30 years' experience in providing pricing information, news, analysis and consulting to buyers, sellers and analysts.
With a global staff of more than 800, ICIS has employees based in Houston, Washington, New York, London, Montpellier,Dusseldorf, Karlsruhe, Milan, Mumbai, Singapore, Guangzhou, Beijing, Shanghai, Yantai, Tokyo and Perth. ICIS is a division of Reed Business Information, part of Reed Elsevier Plc.
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