Http://www.redshawadvisors.com/weekly-carbon-trading-market-update-13th-july-2015/

Market Development

Price rises 17c to �7.62 to end the week ~2% up   Previous resistance level of �7.64 is once again in sight Greece bailout issues continue to cause uncertainty throughout the week Tuesday's strong auction is the catalyst for a reversal of the week's earlier losses MSR passes plenary vote comfortably Power unchanged and EUR strength at the end of the week pushes EUR coal price lower

Auction Overview

11.952Mt of EUAs come to market in 4 auctions this week. July is the highest auction supply month of the year

Price Action

Carbon prices finished the week up 2.28% after a price rally on Friday, fueled by some positive Greek sentiment. As the Greek tragedy unfolded most of the week was subdued with the first 4 settlement prices all within a 10c range (�7.39-�7.49) and trading volumes stayed relatively low. The early move of the week had been lower and a low of �7.33 was touched on Tuesday before a strong auction which cleared above the market catalysed price rises back to near the �7.64 resistance level by the end of the week. Another potential influence of the price recovery was the favourable MSR EU Plenary vote on Wednesday. This passed easily with the vote split by 495 in favour, 158 against and 49 abstentions. With the sign-off expected there was little price impact on the day however it will have added to the positive sentiment. The main price move for the week came on Friday amid renewed optimism of a Greece rescue deal as the Greek PM Alexis Tsipras came back to the negotiating table with a fresh compromise. The optimism pushed the EUR higher and lead to strong intraday clean dark spreads which, coupled with the prospect of a break to the Greek impasse, buoyed demand. Price Impact: the strong end to the week has firmly focused the market on the �7.64 resistance level which it has failed to overcome several times before. A lower auction supply this week, the release of the post 2020 EU ETS proposals, pre-buying ahead of August's reduced auction volumes and further Greek developments will be the main drivers this week. BREAKING NEWS: A Greece bailout agreement has been reached and the �7.64 resistance level has been broken with a Monday morning high of �7.73. Expect consolidaton and potentially further gains now this psychologically important level has been overcome.

Market Stability Reserve (MSR)

The MSR received EU Plenary backing on Wednesday (2 days later than previously scheduled due to events concerning Greece) as MEPs voted strongly in favour of the reform that is designed to achieve higher prices. With 495 MEPs voting in favour out of a possible 702, there was little resistance. The next step is a formal (read: rubber-stamp) endorsement by EU Environment ministers and this is set to take place on 18th September. The endorsement is a formality, effectively meaning there are now no longer any hurdles in front of the MSR. With analysts predicting prices will top �20 by 2020 the MSR will impact all companies in the EU ETS. To speak with Redshaw Advisors about ways to manage your carbon exposure, please click here.

Important MSR Dates

18th September - EU Environment Minister endorsement

Preview - The EU Commission's post 2020 ETS Review to be released Wednesday 15th July

With the formal release of the EU Commission's post 2020 review due on Wednesday 15th July, Redshaw Advisors have pulled out a few of the bigger talking points likely to dominate debate over the next couple of years as the rules are finalised;

Free Allocation - the reduction factor used in Phase IV (2021-2028) will increase to 2.2% (from 1.74% in Phase III) meaning companies will become shorter at an increased rate. However, there are also calls to align the free carbon emissions compliance allocation more closely and easily to production levels although this is a feature not expected in wednesday's draft. capacity increases and decreases currently involve complicated and time consuming processes to adjust free allocation, a simplification of this procedure is likely. Carbon Leakage protection has become an important tool in the EU ETS and is used to protect industry because free allocations are being scaled back. Those deemed at risk of losing market share due to imports from non-ETS affected countries have received 100% of their benchmarked allocation for free in Phase III. Whilst it is recognised that carbon leakage protection for those most at risk is essential and must remain strong, there have been calls for a tiered approach to be taken. This would ensure that those most at risk are fully covered, however, those deemed to be able to pass on varying proportions of their EU ETS costs will receive varying levels of protection from the carbon leakage provisions. A leak of the draft legislation around a month ago suggested that this variable approach would be adopted but another leak around 2 weeks ago contradicted this. Wednesday will be keenly awaited by leakage exposed companies. Administrative burden - it has been recognized that the EU ETS is a huge administrative burden for companies, especially to smaller EU ETS operators who have to spend a disproportionate amount of time and money in order to comply with regulations. Ways to reduce this burden and simplify procedures will be analysed with various member states, most notably the Netherlands, putting forward their own ideas for how to do this.

Redshaw Advisors will circulate a summary of the proposed changes once we have digested the contents of the review.

The Week Ahead

With the Greek crisis cautiously heading for resolution the main driver this week is the lower auction supply than the previous week and pre-hedging of August buys. With August auction volumes halved due to the European summer holiday season it is possible there is some additional demand in the market at present whilst the liquidity is still good. Backloading is forecast to create a �short' year in 2015 to the tune of ~335Mt and according to analysts the price is set to rise further by year-end (see Energy Aspects' latest research, contact us if you do not currently receive this). Wednesday's announcement, while significant for a huge number of companies in Europe, is unlikely to affect price as the companies affected are, currently, typically unlikely to react to events so far away in time by buying additional carbon now.