EU carbon market weekly update - 30 November 2015

A further modest rise in EUA prices is likely this week, although profit-taking could cause some volatility, says Louis Redshaw.

The EUA price closed a quiet week at €8.58, a week-on-week rise of 7 cents (0.8%) with a trading range of just 20 cents. The market was well supplied by five days of auctions and the cover ratios and clearing prices were relatively weak on Monday and Wednesday. Nonetheless, this did not stop EUAs advancing to a high of €8.67 on Wednesday and Thursday.

At one point it appeared that the market could test the year's high of €8.71, but prices failed to climb above €8.67 for two days, despite a strengthening 2016 clean-dark spread, as power price gains outstripped those of carbon and coal.

Price Impact:

The drift higher continues and there is no material reason why this trend should not continue, especially as there is an auction shutdown looming and the coming week sees only about 11.9 million allowances come to the market via auctions, down from more than 15 million in each of the past three weeks. But the market is likely trading long and there is a risk that year-end profit-taking could be triggered by repeated failure to breach the recently established high of the year (€8.71).

European Commission survey finds companies are passing through ETS costs

A study commissioned by the European Commission has found that a significant number of industries are able to pass their EU ETS costs through to their customers. This weakens the case for maintaining free allocations to industrial participants as the current carbon leakage proposals are reviewed for Phase IV (2021-2030).

The cement, iron, steel and refineries sectors were found to have particularly high pass-through rates, which contradicts the lobbying positions of those industries. As the study did not assess whether any market share had been lost due to pass-through costs, it is hard to determine the effectiveness of existing 'carbon leakage' protection provisions.

COP21: what does it mean to you?

This year's annual UN climate change conference (COP21) starts today in Paris and brings together delegates from 195 countries to try to reach agreement on international action. All countries have been tasked with submitting Intended Nationally Determined Contributions (INDCs) ahead of the meeting in a bid to encourage countries to set their own targets to keep global warming below 2°C.

The INDCs should increase the chances of agreement on a meaningful climate change pact because the goals are nationally driven from the bottom up rather than regulated by the UN from the top down. With the political stars aligned (the majority of major participating countries are not close to election cycles), and both the US and China apparently keen on an agreement, there are high hopes for a deal.

In the short term, this probably means very little for an installation in an existing cap-and-trade scheme as, particularly in Europe's case, anyone already taking their climate change responsibilities seriously will likely not be compelled to take them more seriously by anything coming out of Paris.

For example, Europe's 2030 emissions reduction target of 40% is unlikely to be surpassed, so the EU will not be under pressure to reduce its emissions any further. However, the following points should be noted:

• Companies with a global footprint should consider how their emissions in all of their operations will be treated post-COP21 as, in the future, cap-and-trade will affect more countries.
• European companies should be prepared for adjustments to the current Phase IV proposals, in particular in relation to leakage list protection. If the EU's competitors are also limiting carbon emissions, there will be less room for protectionism.
• A ground-swell of support for carbon reductions could embolden countries to tighten their emissions targets in the medium term as each successive COP meeting seeks further unification of effort. This could ultimately include Europe.
• One thing is a near certainty – the administrative burden on companies will increase as monitoring, verification and reporting requirements are expected to be the main legally binding outcome from COP21.

The week ahead

COP21 is unlikely to have any impact on EUA prices, but it might lead to some positive or negative market sentiment depending on the progress of the discussions. A slow grind higher into the year-end is the likely outcome, with some volatility injected by potential profit-taking and the suspension of auctions.

Louis Redshaw is a founder of Redshaw Advisors

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