CO2 market

EUA price targets 2019 high

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The benchmark carbon contract gained more than 10% in June in a monthly comparison and 9.5% year to date. The EUA price remained volatile in the first half of the year as the start of the market stability reserve helped it testing new highs, while the risk of a no deal Brexit pushed the price lower from time to time. In February, when the British Parliament rejected the withdrawal agreement negotiated by the Prime Minister Theresa May with the EU, the EUA Dec19 fell even below 20 euros.

In April, when the compliance deadline approached and there was no hard Brexit pushing the prices lower, last minute buyers lifted the price to new 2019 highs. The benchmark contract skyrocketed by 22.05% in April from March levels.

The price lost 6.96% in May, as compliance entities were less active than in the previous month. The EUA Dec19 still remained above 24 euro as utilities kept purchasing allowances to hedge their production.

The end of 1H2019 brought more buyers to the market. Beside “window dressing” for accounting reasons, and higher utility demand due to the heatwave affecting Europe, some companies might have also bought allowances for compliance expecting higher prices in the next months.

The EUA Dec19 was the second best performer of the energy mix in the first half of the year. Brent was the gold medallist (+23% from December 2017) with OPEC+ production cut and political tensions between the US and Iran reducing the supply.

The benchmark German power contract lost 11% in the same period, as temperatures were mild and traders prices in cheaper coal (-23.3%) and gas (-16.7%).

Announcements on free allocation

Early summer, there were two announcements that will affect installations’ future allocation of free allowances.

The first one came from the European Court of Justice (ECJ). In a case initiated by ExxonMobil Germany, the European Court of Justice upheld the ruling of the Administrative Court in Berlin reducing its free allocation entitlement. The request has been made concerning an application for free allocation to a natural gas processing installation which carries out, inter alia, sulphur recovery, in the course of which, by combustion of fuels, it generates electricity and heat, releasing carbon dioxide. The ECJ ruled that in similar cases, free allocation could be only distributed, if the heat is used in district heating or high efficiency cogeneration. The decision might trim hopes of similar installations for future free allowances.

A draft implementing act establishing rules for adjusting the free allocation due to activity level changes during phase 4 of the EU Emissions Trading System, from 2021 until 2030, has been published on the Better Regulation portal for a four week stakeholder feedback period open until 9 July 2019.

While the revised EU ETS Directive establishes the main rules for adjusting free allocation to activity level changes, more detailed implementation requirements need to be determined. The Directive establishes that the level of free allocation will be adjusted, as appropriate, if activity levels change by more than 15%, evaluated based on a rolling average of two years. The draft implementing regulation sets out further provisions to ensure the effective, non-discriminatory and uniform application of the adjustments and threshold set, to avoid undue administrative burden and to prevent manipulation or abuse. After the feedback period, the Commission will submit the draft for vote in the Climate Change Committee. The Commission will then adopt and publish the regulation, which will enter into force on the twentieth day after the publication.

The draft act and the space for feedback is available on the following link.

Preview for July

In the last six years, the carbon price always increased in July, except the year 2016 when the Brexit referendum took place (23 June 2016).

The reason might be that companies that buy allowances on a regular basis (mainly utilities) bring their purchases forward as auction supply is reduced by 50% in August.

Open interest data in call options also indicate that market participants expect higher prices in the future. Among the call options that expire in December 2019 the one with the highest open interest (33 million units) is with the strike price of 40 euro. 26 June, a record volume of 11.75 million of call options to buy allowances in December at 50 euro cleared on the ICE exchange in London.

Potential gains might be kept by fears of a hard Brexit as the new British Prime Minister will be elected 23 July and the most likely candidate to win is Boris Johnson who underpinned several times his support for a no-deal Brexit.

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