EU Carbon Price Edges Up On Falling Auction Volume

London (Platts)–1Aug2013/747 am EDT/1147 GMT The price of carbon dioxide allowances under the EU Emissions Trading System edged higher in late July, bouncing back from a dip earlier in the month, and taking modest support from expectations of a sharp drop in primary supply in August. The first half of the month saw prices drop sharply, after the market appeared to have been overbought ahead of the July 3 EU Parliament vote on market intervention. Despite the EP voting yes to the EC’s proposal to withhold up to 900 million EU Allowances from auctions, EUAs for December 2013 delivery eased to a low of Eur4.03/mt on July 10, down from an intra-month high of Eur4.69/mt on the day of the vote. Market participants generally agree that prices would have collapsed much further if the EP had rejected the proposal for a second time — an outcome which would have spelled the end for the EC’s proposals to use auction timings to shore up the price in the short-term. After testing apparent support at just above the Eur4.00/mt level a few times in mid-July, prices began to claw back some ground, rising to Eur4.33/mt by July 26. In general, the seasonal lull took hold in July, with traders drifting away from the markets for the summer break, which typically sees a drop-off in trading volume in July and August. A moderately bullish element emerged in the form of expectations of restricted primary supply in August. The volume of EUAs to be auctioned by governments in August will more than halve from July’s volume, according to exchange data compiled by Platts. The total volume of EUAs to be sold in auctions will drop to just 33.65 million mt in August, down from 76.9 million mt in July, and 65.9 million mt in June, according to data from Germany’s European Energy Exchange and the ICE Futures Europe exchange in London. And on a weekly basis, the volume in August will drop to just over 7 million mt, down from 14 million-15 million mt per week in 2013 to date, according to the exchanges’ scheduled auction calendars. While the drop in auctioning volumes in August reflects the summer lull in trading, the restricted volume may create short-term upside for EUA prices as the market factors in the tighter supply. However, market sources generally say the lower supply in August has already been factored into prices, given the advance notice given by the exchanges. September’s volume is set to bounce back to 69.3 million mt, the figures show. The EC in July carried out its planned suspension of the Union Registry — the EU’s central database which tracks ownership of carbon units. The temporary closure allowed a series of upgrades that allow the swapping of Phase II EUAs with those valid for Phase III — so-called “banking” — and to allow greater clarity on the eligibility of international offsets for EU ETS compliance. Following the upgrade, international credits held in the EU ETS and EU Kyoto Protocol accounts on the registry will be marked as either “eligible” or “pending/ineligible,” helping to facilitate appropriate use of credits under the EU ETS. Late July saw three days when no trading volume was recorded on CER futures contracts on London’s ICE Futures Europe exchange. Market sources said several factors could have led to the halt in liquidity. CER issuance has been falling in recent months as CDM investors hold back from requesting credits. In addition, some companies may have fully utilized their annual quota limits for offsets under the EU ETS, meaning they have no further need for CERs. Clearer EU eligibility rules on the use of offsets could also have boosted interest in cheaper Emission Reduction Units from the UN’s Joint Implementation program, denting demand for CERs, sources said. Elsewhere, the EC plans to make a decision on the level of free allocation of EUAs in September, it said July 30. The announcement ended months of speculation about the timing of free allocation this year, which normally occurs in February each year. The decision will set out the amount of allowances given out to European companies in the period to 2020, as well as the final overall carbon cap in the period. “The Commission is currently scrutinizing the NIMs,” the EC said, in reference to EU member states’ National Implementation Measures ? the government plans which set out the level of allowances to be allocated to each installation. “Thanks to the collaboration of Member States, this work is nearing completion,” the EC said in a statement on its website. “The date of the adoption and publication of the decision will be announced on this website at least 24 hours in advance,” it said. The decision means companies with operations regulated by the EU ETS will have greater clarity on the level of free allowances they receive in the period to 2020. “EU ETS rules foresee that a cross-sectoral correction factor should be applied if the preliminary allocation for industrial installations through NIMs exceeds the maximum amount of allowances available,” the EC said. “In this case, free allocation to all industrial installations across the EU would be reduced by the same proportion,” it said. Following adoption of the decision, EU member states’ registry authorities would be expected to distribute the free allowances to the operators of regulated installations. This will take around one to three months, depending on the procedures to be applied in each member state, and whether the EC decision requires changes to the preliminary allocations in the NIMs, it said. The decision on free allocation may also impact the overall number of allowances to be auctioned in the period, the EC said. “Once the decision is adopted, the Commission will examine whether this is the case,” it said. “If so, it will be assessed and decided, together with Member States and auction platforms as well as in line with relevant provisions in the Auctioning Regulation, whether any adjustment to the volume to be auctioned should be made to the 2013 auction calendars or taken into account in the 2014 auction calendars,” the EC said. –Frank Watson, frank.watson@platts.com Taylor Scott International