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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 Continue reading
A Look At South Africa’s Carbon Trading Potential
2 August 2013 – According to Glenn Hodes-senior program manager (UNEP), the carbon market in South Africa will help to level the playing field by making renewable projects more attractive to investors. Small-scale renewable projects (less than 50 MW) which are pursued in South Africa due to dispersed populations, have struggled to obtain finance from large companies and banks. However, with carbon trading, more attention will be brought to these projects. “This would certainly deal with the poverty issue more effectively as the power is closer to where the demand is,” Hodes says. But, how will carbon trading benefit South Africa’s renewable energy projects? Hodes says that if there is a price on carbon, whether through tax or a trading regime, private companies will be incentivised to invest in renewable energy projects and technology. “I think the private sector is for carbon trading. It sets a clear market signal.” But why hasn’t carbon trading taken off? Hodes blames this on uncoordinated attempts, regulatory and policy challenges. He explains that the implementation thereof and global connections can make it a challenge for carbon trading to work. There have also been circumstances under which baseline-and-credit CDM schemes have resulted in the maltreatment of indigenous peoples and their environment. There have also been cases of trade fraud and accounting discrepancies. Low levels of awareness as to how to access this market as well as a poorly resourced department are also to blame, according to the experts. South Africa has already missed a number of opportunities as it failed to capitalise on the first commitment period (2008 to 2012) of the Kyoto Protocol. Until the 17th international annual climate conference, COP17 in 2011, opportunity for South African carbon project developers was mostly to generate and sell carbon offsets (CERs). These CERs were sold from countries classified as developing countries to companies in developed countries which are bound by the emissions reduction targets of the Kyoto Protocol to reduce annual greenhouse gas emissions. The Clean Development Mechanism has in the past given South Africa the opportunity to benefit from registering carbon credits or CERs. Other developing countries such as China, India and Brazil managed to register hundreds of emissions reduction projects under the CDM and got developed European countries to finance sustainable development in their countries. Currently, only 22 South African Project Design Documents (PDDs) have been registered by the CDM executive board as CDM projects, with only nine having actually issued CERs. In comparison to other developing countries, South Africa seems to have missed out on significant clean development opportunities. However, when the 2015 South African carbon tax comes in to effect, the demand for carbon credits via the voluntary market in South Africa will impact the country’s carbon trading. To ensure increased tax free thresholds, companies will be encouraged to reduce their CO2 emissions. To help them reduce their emissions to reduce tax liabilities, South African companies will most likely be able to purchase carbon credits from verifiable projects to offset a proportion of their carbon obligation. This means that there is scope for South African carbon projects to sell their credits in South Africa to local companies via a regional carbon trading scheme. There is talk that companies will be able to offset their tax liability by buying local carbon credits equivalent to 5% to 10% of their carbon tax liability. This will have an impact on the liquidity of the local market as a result of increased demand for local credits which will see a boost to local carbon project development. Continue reading
Permits To Pollute Can Be Bought Too Cheaply
Cheap emissions permits means industry hasn’t traded in its polluting ways. David Davies/PA When the carbon price collapsed to below €3 in April this year, EU policymakers sought to prop up carbon prices by a deal that would delay the release of carbon allowances (known as “backloading”). This deal was agreed by the European Parliament in July , but has had little impact – prices still languish at around €4-5, well below the highs of €30, the sort of level economists consider necessary to bring emissions under control. Is this a disaster? Does it mean the death of the carbon markets , as many have suggested ? A recent op-ed in the Financial Times made the case that prices do not matter much. The emissions trading scheme (ETS) simply ensures that Europe meets its emissions targets. A low carbon price is not necessarily a sign of trouble. In fact, if – it’s a big if – it’s the result of substantial, sustainable emissions reductions, a low price is a sign of success. But is the point of the ETS simply to ensure that a short-term cap is met? And if so, can the ETS be considered to be a success? Let’s look at the second question first – is the EU ETS making a major contribution to reducing short-term emissions at very low cost? Certainly, emissions are declining in Europe. The official numbers show that between 2005 and 2010, industries covered by the EU ETS cut their emissions by roughly 8% . The ETS is doing its job, one might conclude at first glance. However, those regulated by the ETS are, it turns out, no different to other polluters. Over the same period, total carbon emissions in the 27 EU member states fell by just over 8% , which implies there is little difference between those industries regulated by the ETS and those that are not. Two preliminary studies ( Jaraite and Di Maria, 2011 and Calel, 2013, forthcoming ) directly compare them, and neither uncovers any systematic difference. If the EU ETS isn’t doing the bulk of the work, what is driving the fall in emissions? Most studies (see, for instance, Anderson and Di Maria, 2011 ; Cooper, 2010 ; Kettner et al., 2011 ; Bloomberg New Energy Finance, 2009 ) suggest that the lion’s share of cuts has been driven by other factors such as the EU’s energy efficiency and renewables targets, the recession, and the high price of oil. The ETS has an impact too, but it cannot take credit for the majority of the cuts that have been achieved. Let’s now return to the first question – what is the point of the EU ETS? Certainly, a major objective is to ensure that a short-term cap is met. But another is to set the direction for the economic transition to a cleaner economy. What really matters is the total emissions produced up to 2050, not just those in the short term. And what matters greatly for the health of our economies is that this transition is undertaken gradually and smoothly. We don’t want to move too fast to begin with, but if we dawdle and move too slowly then a late rush to catch up and consequent upheavals will cost economies dearly. A carbon price of under €5 indicates that the system is sluggish – especially when such low prices can be seen to be the result of recession and financial crisis, not a miraculous decarbonisation of our economies. Even at these low prices, has the EU ETS sent a signal to businesses that the development of new low-carbon technologies is likely to yield profits in future? Encouraging evidence from some recent studies suggests that, though few in number, some businesses have invested more in R&D and patented more low carbon technologies. This innovation response seems strongest among those businesses that foresee the future will bring a high carbon price. So while the ETS is not the main driver of low carbon innovation – nor should it be – even in its current state it has encouraged some low carbon innovation. But instrumental to even this modest success, it seems, is that policymakers follow through on the promise that the trading scheme deliver a higher carbon price in the future. Where does that leave us? Should we worry about low carbon prices? Yes – the rock bottom carbon price is not a sign of success. It simply reflects a glut of permits on the market at a time of low economic activity – permits too numerous and cheap to force businesses to invest in innovative means to cut emissions. Low prices matter because they dampen the signal that low-carbon innovation will pay. The EU Parliament’s backloading measure does not directly address this, but it buys time for policymakers to cancel carbon allowances which would restore prices to higher levels. A higher carbon price would get the message to businesses that investment in decarbonisation is money well spent for the long term. When at last zero carbon technologies become economically competitive, we can celebrate the collapse of the carbon price. But that is likely to be some time into the future. Continue reading
