Weekly Carbon Trading Market Update - 27th July, 2015

Market Development

Price closes at €8.02, a week-on-week rise of ~3.5 %   First time carbon has been back above €8 since 2012 EUR denominated coal falls to leave clean dark spread relatively unchanged French carbon tax increases to €56 per tonne by 2020 and €100 by 2030

Auction Overview

14.806Mt enters the market this week in 5 auctions Next week the volume drops to 7.541Mt Last week of full auction volume before August reductions. 63Mt enters market through July compared to 27Mt in August.

Price Action

As predicted in last week's weekly we saw another strong week for carbon emissions trading as the front December contract closed 3.48% up at €8.02. The underlying demand in the market, likely from speculators and utilities alike, caused the 27c week-on-week gain and saw the psychological €8 barrier broken. With an intra week high of €8.15 the carbon price is at a level not seen since 2012. The move up is simply a combination of backloading tightening supply and anticipation of the August auction reductions halving the already reduced level of supply. Demand in the market is outstripping supply and as long as backloading continues (i.e. to the end of 2016) we will see sustained price gains.

Arguably the sideways drift of recent weeks was a result of additional supply from speculators becoming increasingly nervous about a Greek exit from the Euro and a weakening Euro, downward pressures relieved by successful adoption of a 3rd bailout package as well as some positive sentiment following the EU Commission review proposals. July also sees the highest auction volumes of the year (with 63Mt coming to market) to partially compensate for the reduced volumes in August. Traded volume increased down the curve (i.e. in later delivery years) which is typically a good indicator of utility involvement in the market as they hedge forward power sales. With the price of EUR denominated coal falling the EUA price rises were offset to leave the clean dark spreads relatively flat week-on-week.

Price Impact: August is historically the most bullish month of the year (price has increased every year since at least 2008), presumably, at least in recent years, due to auction reductions in this month so this year should be no exception. Prices will be at least supported and we may well see some further gains (although speculators, relying on this fact, will be unwinding as the ‘rumour' turns into fact). The EUR has stopped sliding relative to the USD so is worth keeping an eye on in case it materially affects EUR denominated coal price, the Clean Dark Spread and ultimately EUA demand. Market Stability Reserve (MSR)

The MSR has passed all but one legislative hurdle, the last one is expected to be a formality and thus a fully operational MSR reducing auction supply by 12% of the total over-supply in the market per year will come into effect in early 2019. You can read more about the MSR here. Important MSR Dates:

18th September - EU Environment Minister endorsement

France Hikes Carbon Tax To €100 In Strong Pledge To Reduce Fossil Fuel Use

France passed an energy bill last week that will see the domestic carbon tax rise to €56 per tonne in 2020 and €100 per tonne in 2030 in an effort to reduce fossil fuel use by 30% by 2030 from 2012 levels. In a statement of intent France has laid down a serious marker for other countries ahead of UN climate change negotiations in December. Additionally, France aims to reduce its reliance on nuclear power to 50% of its energy needs by 2025 in a push to use more renewable sources of power generation. With the carbon tax currently set at €14.50 per tonne, the move signals a price increase of >650% from current levels by 2030. Although not affecting those installations covered by the EU ETS, those outside the scope will face a dramatic increase in costs in a move that further underlines the intent of EU politicians to pursue aggressive approaches to climate policies and firmly places the onus on the rest of the world to ‘step up and do their bit'. The Week Ahead

With €8 now likely to turn into a support level for carbon price, further gains are possible. As Europe enters the main holiday season it is likely we see some low volume trading sessions as both demand and supply tail off.