Barclays and other analysts are praising the market saying it is working and suggesting the price drop is a function of oversupply. They argue an oversupplied market will see the price dropping.
That may be true, but what about the intent that created the market in the first place?
Phase I of the EUETS saw the price collapse from 30 Euro to cents towards the end of 2007. Analysts believe that the collapse was from misallocation of units in Phase I.
It seems that the same thing is happening towards the end of Phase II or the Kyoto Commitment period which ends this year.
What are the possible factors:
- The EU in recession meaning that growth in emissions are less than expected as they follow economic growth generally
- The NER 300 where a large scale auction of EUA was passed to the EIB to raise money for CCS projects
- Unclear policy statements such as the renewable energy targets announced in April 2011, that needed urgent clarification that these were not a substitute for market instruments
- Regulatory changes as to the EUETS access for CDM projects
- Industrial process CER
- Coal efficiency projects
- Large Scale Hydro (>20mw)
Since the ban on industrial gas CER was announced the race to issue CER in these projects has seen them increase from 64% of the CER issued to over 80%. Volumes have skyrocketed and are expected to continue to increase.
However there is a limit to the volumes of CER able to be surrendered in the EUETS, compare this to the AUETS in 2015 allowing 50%, and the NZETS with no limits.
The EU parliament has responded to the collapse in EUA prices by first voting to set aside 1.4bn EUA from auction, which on a second vote was re worded to ‘large volumes’
The set aside can only be temporary whilst the EU works on implementing a more stringent limit for 2020, down from the 20% of 1990 levels to 30%. Something they say could take 18 months.
Even the addition of Airlines into the ETS see twitter @eitg is being dealt with largely by grand parented allowances.
So what may happen next? After the market moved substantially from long on carbon with the announcement of the NER300 it is reportedly heavily short.
Options have remained pretty static indicating traders are not sure where the market will end up.
Common sense says that the market is intended to place a price on emitting. Everyone would agree the current price is not one that provides a clear message to emitters to change behaviour and certainly not one that would encourage them to make long term investments in reducing emissions. Its too easy to wait, stock up on cheap credits and ride out the market.
Time for the regulators to remind everyone why we have carbon trading. But when will they act?