Weekly Carbon Trading Market Update – 7th December, 2015

Market Developments

EUA carbon trading price closes the week at �8.51, down 7c week-on-week Outright traded volume in Dec 16 highest ever as contract is about to become the new �front' contract Strong EUR buoys clean dark spreads as EUR coal price falls sharply GBP carbon price jumps despite carbon weakness UPDATE: COP21 progress

Auction Overview

059Mt comes to market this week in five auctions Last full week of auctions in 2015 Volume falls to 32.7Mt in December, down from 59.8Mt in November, due to Christmas shutdown. Last auction 17th December

EUA Price Action

The EUA price closed the week at �8.51, a return to the closing price of two weeks ago and a week-on-week fall of 7c (0.8%). Traded volumes were high during the week with the majority of the volume �rolling' positions as traders switch exposure to December 16 from the December 15 contract ahead of the December 15 expiry (in order to avoid taking physical delivery of carbon credits). With a weekly trading range of just 23c price action was limited and the only obvious driver all week was the strength of the Euro. The ECB's lower than expected interest rate cut spurred Euro buying (seemingly mainly short covering) sending it markedly higher against most other major currencies. The strength against the USD caused the clean dark spreads to rise as coal, priced in EUR, became cheaper and pushed the clean dark spreads to their highest level since early October. This in turn buoyed the Dec-15 carbon price which rose from the low of �8.42 before the European Central Bank announcement on Thursday to a high of �8.65 on Friday. Contrary to our expectations the price fell away in the afternoon session on Friday to close the week 7c lower. Price Impact: the sideways price action that we have seen for the last 4 weeks now looks set to continue in the absence of news. Last week we expected price rises against a backdrop of reduced auctions and the prospect of no auctions after 17th Dec however this didn't happen so, all things being equal, if anything there is a slight bearish tinge to our outlook for this week with full auctions. One looming unpredictable factor, that may have already come into play, option expiry on Wednesday this week. Some artificial supply and demand from those seeking to influence or hedge the price at expiry may lead to a bit of volatility with the potential for the underlying trend to resume afterwards. One note of caution: last year's end of auctions in December lead to steep price rises, presumably due to lack of supply, however this was immediately followed by steep price falls before the auctions had resumed. While we might ordinarily expect price rises when there are no auctions it should not be taken for granted, price direction is difficult to call in the abnormal supply period over Christmas. Paris COP21: progress update

With Conference of the Parties ("COP") number 21 in Paris now at the half way mark, negotiations are handed over to ministers until the close of talks at the end of the week. Progress in the first week is hard to quantify with only a draft text to go on with a lot of fundamental differences between countries remaining. The French Presidency will need to steer the negotiations carefully and skilfully to ensure that an agreement is achieved at the end of the week. French diplomacy will be leaned on heavily and they are under a lot of pressure to make this meeting work. Compromise will need to be found on the critical issues of finance and mitigation aims along with closing the gap between the developing and developed countries. We summarised our expectations for COP in last week's carbon market update and we don't expect any ground-breaking progress that will affect companies covered by the EU ETS, in the short term.

If there are material developments we will produce a special report for our customers. The week ahead

With option expiry on Wednesday the waters might well remain choppy and overly sensitive to price action as traders manage exposure. Following that it is hard to see where significant up or downside pressure comes from. With an auction shutdown on the horizon, fresh supply into the market will soon cease but it is an auction timetable that has been documented for a year and it is hard to see it catching out any regular market participants. However the shutdown does allow for more volatility. As the market becomes thinner at this time of the year it becomes less stable so any large order or change in the weather, such as a cold snap, can really influence the natural demand and supply balance and thus prices.