Curtain raiser: Carbon back-loading starts to bite

Carbon prices opened softer on Monday and, despite securing a record cover ratio, fell further when another auction result shaved value off the EU allowance price as profit taking and disappointment over auction result put pressure on the Spot contract.

While the UK auction marked the formal start of back-loading, this week should see the measure start to bite as both the EU and German auctions are impacted. Back-loading aims to temporarily boost carbon prices over the next few years, while the EU works out a longer-term solution to reform the carbon market.

In the first half of Monday’s session, the EEX carried out an auction on behalf of the European Commission and participating countries, offering 1,927,500 Spot Phase III EUAs to the market. The auction cleared at a price of €6.15/tonne of CO2 equivalent (tCO2e). This is about 3% lower than where the contract settled on Friday, when it closed at €6.35/tCO2e. The outcome was also substantially below the previous EU auction result on 11 March – before the advent of back-loading – when 4m EUAs were sold at €6.81/tCO2e. ICIS data show that the last time the EUA Spot contract closed below the €6.15/tCO2e level was on 2 February, when it settled at €6.05/tCO2e. So far in 2014, the contract has closed at an average price of €5.90/tCO2e.

The carbon price started to tumble when back-loading officially kicked off last Wednesday, on 12 March, when the UK offered the first reduced auction volume to the market. At the time, traders had cited a disappointing auction result, in terms of the price and the cover ratio – bids for allowances versus the number of EUAs available – as pressuring prices. The cover ratio for Wednesday’s auction was 4.0, almost twice as high as the average UK auction cover ratio of 2.2 for the other auctions in 2014, with the price settling at €6.80/tCO2e. However, in the face of even higher expectations, these figures failed to support prices.

The auction cover ratio of Monday’s EU auction stood at 12.1, again substantially higher than the 4.3 EU auction average in 2014 so far. This reflected the fact that the lower supply under back-loading had not “fundamentally” affected demand for allowances in the market, carbon analysts Tschach solutions, now owned by ICIS, said in a briefing note.

Another two EU-wide auctions will take place on Tuesday and Thursday this week, each offering a further 1.9m Spot EUAs to the market. In addition, Germany is expected to offer a reduced auction volume of 2.4m EUAs to the market on Friday, 21 March, reduced from the usual 4.6m.

According to the approved back-loading proposal, 400m tCO2e will be withheld from auction in 2014; 300m tonnes in 2015 and another 200m tonnes in 2016. These allowances will then be returned to the EU emission trading system (ETS) in two batches – 300m tonnes in 2019 and another 600m tonnes in 2020. Marie-Louise du Bois