EU ETS allowances 'to average €5.75/t CO2e this year'
London, 8 January (Argus) — The December 2013 EU emissions trading scheme (ETS) allowance contract will average €5.75/t CO2 equivalent (CO2e) this year amid significant uncertainty over the political will to intervene in the scheme, according to commodities brokerage Jefferies Bache.
The downside concern for 2013 is the “political footing” of the European Commission's proposal to back-load allowances from the early years of phase 3 (2013-20), carbon analyst Matthew Gray said today. Germany is still undecided on the proposal, with divisions between the country's environment and economy ministries. If Germany cannot agree, the vote will fail, since smaller member states will probably abstain without a commitment from Berlin, Gray said.
The worst-case scenario is that the vote fails and prices collapse — possibly to €3/t CO2e. The commission would lose credibility in this case and its calls for future intervention would not be taken seriously, he noted.
But Germany is likely to ultimately vote in favour, Gray added. “Their nuclear decommissioning plan depends on either a strong EU ETS allowance price or a significant up-scaling of their renewable policies.” Germany is currently stalling on the vote because of the country's forthcoming elections, he noted.
The allowance curve will not hold up front-year contracts as much as expected, the bank wrote. Utilities are highly hedged going into this year and they rarely participate in the spot market. “Given there is little evidence of utilities building strategic reserves, the first three quarters will likely prove bearish, with a potentially bullish final quarter.”
Phase 3 auctions will bring an average daily volume of 2.8mn t to the market, Gray noted. Cover ratios in phase 3 auctions have gradually declined, he added. In the absence of any developments on the back-loading proposal, if the cover ratio is consistently below two times, then it would imply a demand crunch beginning, leading to steady declining emissions prices.
The clean development mechanism (CDM) may never recover, Jefferies Bache said. The back-loading proposal for allowances will not affect UN offsets and there continues to be an “issuance stampede” of emissions reduction units (ERUs) and certified emissions reduction (CER) units. Demand has been steadily “drying up.” The CER-EUA spread will increase from €7.50/t CO2e in 2013 to €13/t CO2e in 2015, the bank said.
Offset prices for the front-year contract are unlikely to average more than €0.50/t CO2e over the next two years, UK bank Barclays Capital said in a research note yesterday. There is unlikely to be considerable sovereign buying of CERs and ERUs to meet Kyoto protocol compliance obligations. Australian ETS demand will not be significant in the next couple of years to soak up supply, the bank added.
“Given all of this, we think it is unlikely that CERs and ERU prices will get back above €1/t CO2e by 2020,” Barclays carbon analyst Trevor Sikorski said. “The low price of offsets and the manner in which so much ERU supply has entered the market so quickly raises questions about the environmental integrity of these offsets.”
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