This is a condensed version of our analysis for ICIS EU carbon subscribers that was originally published on 26 July at 10:04 CET.
The CER price experienced a whopping 46% increase between 2 and 19 July with many participants struggling to understand why.
While the exact reason behind the price is unclear, we believe the rise is due to EU ETS compliance player(s) using their leftover offset quotas amid the EUA bull run and possibly speculator(s) taking long (cheap) CER positions expecting tightening CER demand in the EU ETS (increase usage of left over quotas) and the international context (e.g. international aviation).
- The CER Dec-18 benchmark increased by 46% from €0.24 on 2 July to €0.35 on 19 July
- This level was last seen back on 16 November 2016
- The price rise was supported by unusually high trading volumes of up to 775k tonnes on 18 July
- The bullish trend slightly subsided with CER price settling back down to €0.28 on 1 August.
CER demand and supply in the EU ETS
- On the demand side, we estimate that EU ETS market participants have less than 50m opened offset quota for the rest of TP3
- On the supply side however, according to our CDM model, the market of Green CERs remains significantly oversupplied in terms of overall issuance at this point
- However, the volume of “readily available” green CERs is likely to be significantly lower, which is likely to have supported the sudden CER price jump
- A large share of the issued green CERs are likely to have been channelled to the voluntary market where “nice” projects can fetch higher prices than in the EU ETS
- In parallel though, some EU ETS players might have “old” issued CER volumes they have been sitting on for years and might have been willing to sell
- As for new green CERs issuance, EU ETS utilities with large CDM projects in their portfolio are likely to issue CERs only for their own compliance needs as the CER price is too low to justify issuance costs for market selling
Potential CER price rise drivers
- In our opinion, this CER price move is not backed by an obvious regulatory or market development
- It is therefore challenging to point towards a specific reason for the price move as there are many different potential reasons
- EU ETS
- Compliance players using their open offset quota leftover for TP3 amid the EUA bull run
- Speculators taking a long (very cheap) CER position expecting CER prices to move up in 2019 and 2020 as EU ETS compliance players use their left over open quotas
- South Korean ETS
- Players buying CERs towards their compliance needs
- South Korean ETS allows for certain CERs of Korean projects being used for compliance
- Columbia CO2 tax
- Columbia introduced a carbon tax in 2017 at around $5
- Under the tax regulation, companies can use Columbian CERs to offset their emissions and are therefore exempted from the tax
- International aviation
- ICAO is expected to agree on offset eligibility criteria for international aviation next September
- Speculators could be making move to secure long position hoping for CER to make it on the ICAO list
- EU ETS
- In our opinion, the CER price rise was driven by
- EU ETS compliance player(s) with left over TP3 offset quota and amid the EUA bull run (making the swap attractive)
- And possibly speculators going long expecting higher CER demand in the short-term
- in the EU ETS with compliance players expected to use their offset quotas, especially as prices are expected to rise fast with the MSR starting
- on an international level from various international schemes
- While we estimate the green CERs is in principle well supplied, we believe the readily available volume is low
- With CER sellers needing time to unlock their CERs, small volumes are likely to have increased the CER price quickly
- Overall, we believe that the CDM “good old days” are not back
- Because the EU ETS, which has been a key source of CER demand, does not allow the use of international credits for compliance in TP4 according to current post-2020 legislation
- However, the multitude of schemes accepting or potentially accepting CERs internationally (aviation) could potentially attract speculators making a cheap bet on CERs with a very low downside risk
- This development, in addition to EU ETS compliance players using their left over offset quotas could very well generate upside support for the CER price in the coming months
- Such price rise is however unlikely to be sustained as CER sellers turn the CER issuance tap from existing projects
Yann Andreassen is Senior Analyst - EU Carbon & Power Markets at ICIS. He can be reached at Yann.Andreassen@icis.com
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