Weekly Carbon Trading Market Update - 12th October, 2015

Market Development

EUA carbon price closes the week at �8.35, up 20c week-on-week Year high of �8.43 in sight Power and coal both gain as wider commodity prices also rebound for best week since 2012 Clean Dark Spread rises as Euro strengthens German factory orders unexpectedly fall in August Strong Friday auction helps push prices higher into weekend MSR published in OJEU and so becomes law

Auction Overview

075Mt comes to market this week in five EUA auctions 170Mt EUA auction supply in October

Price Action

Another strong week for carbon trading as prices rose 20c to finish the week at �8.35, a week-on-week rise of 2.45%. The market rejected a move to the downside in the first half of the week (when the intra-week low of �8.06 traded on both Monday and Wednesday) and a strong auction on Friday (clearing 1c above the market at the time with a strong cover ratio, see below) catalysed the bears to close short positions. An unexpected fall in German factory orders in August, coupled with weaker CDS levels, left carbon prices struggling in the first half of the week. However, continued strength in the EUR/USD exchange rate helped push clean dark spread levels higher (thus incentivising utility hedging) and below average temperature forecasts for the next 2 weeks helped demand and thus the carbon price to recover from the week's low. From there on carbon prices rose and there appeared to be a �short squeeze' on Friday as market participants were forced to exit or even reverse short positions and prices moved rapidly higher. Overall, commodities had their best week since 2012 as measured by the Bloomberg commodities index which rose 4.4% last week. Price Impact: the year high of �8.43 now appears to be firmly in sight and moves higher in the early part of the week look likely. If buying interest is sustained (as expected) and prices rise through �8.43, further gains can be expected with �8.43 becoming good support if prices weaken again. Market Stability Reserve published in Official Journal

The final legislative stage for the MSR has been completed as the MSR amendment to the EU ETS directive was published in the Official Journal of the European Union. This now means all the stages to become part of EU law are complete and the MSR will start as planned in 2019 bringing to an end a ~2 year process. Volkswagen's darkest days could benefit the environment

The road transport lobby is all-powerful in Europe and they are one of the main reasons that the sector is not currently accountable for its greenhouse gas emissions under Europe's cap and trade system. We think they've got this wrong, especially when Michael Horn, President and CEO of Volkswagen Group of America is quoted in the press saying in relation to vehicle emissions, "Our company was dishonest�we have totally screwed up." To read more please click here. The week ahead

With prices having moved higher it seems to be a matter of when, not if, a new high for the year is set. With further long term price rises forecast it is becoming more and more unlikely that industrial participants will rush to sell any excess volume. Given backloading's consistent removal of supply since 2014 (which continues until the end of 2016) and the market's continued rejection of bearish influences, further gains are on the cards with volatility really only coming from short term events related to the Clean Dark Spreads (and therefore coal, power and FX rates).