Weekly Carbon Emissions Trading Market Update - 22nd June 2015

Market Developments • EUA prices fall 20c over the week to end at €7.44. • Prices continue to move sideways within a range. • USD denominated coal rises in price but EUR strength against the USD is counteracting the rises. • Taiwan sets climate goals with ETS the chosen method to achieve them. • EU loophole could cut cap by up to 304Mt in 2021.

Price Action Carbon prices failed to follow through the previous week's strong close with the week ending at €7.44, 20c lower than the previous week. Prices are back to the same level they closed at 2 weeks ago in continued ‘sideways' trading as the demand and supply seem finely balanced in the carbon emissions trading market. With a 22c range through the whole week the market was subdued as prices drifted off. The high of €7.64 was on Monday and the low of €7.42 on Friday afternoon. For those who watch technical analysis it is suggesting that the market is approaching a convergence of both up and down trend lines in a so-called pennant formation, suggesting a breakout to either the up or downside will soon happen. Power prices again moved sideways, however, coal priced in the base USD currency has been rising. It reached a 3 month high last week but the strength of the EUR against the USD was working to counteract the price rises and left it more or less unchanged in EUR. As previously discussed, a reversal in the EUR strength against the USD (for example with a Grexit) could have a significant negative effect on the clean dark spreads and therefore reduce the underlying demand for carbon as utilities sell less power and have no immediate need for carbon permits to hedge exposure. Price Impact: a full week of auctions again keeps the market well supplied. With the price currently on or around the uptrend line, any falls below this line could cause a test of €7.20. Should prices bounce off this line, the €7.60 level will be an area of resistance to further rises and a break above this could lead to a test of the year's high at €7.90. Chance are we continue to be narrowly rangebound until something gives. Keep an eye on the Greek situation for its potential impact on USD/EUR, movements either way could have an impact on carbon via the Clean Dark Spread.

EU loophole could cut cap by up to 304Mt in 2021. An ‘effort sharing' loophole could cut the emissions cap by as much as 304Mt in 2021 if some of the richer member states choose to meet non-ETS sector emissions reductions via a loophole that allows them to use EUAs. EU climate goals state that member states must cut non-ETS emissions by 30% by 2030 and a loophole will potentially allow them to do this via EUA purchases in a limited one off reduction. Current rules allow nations to use offset allowances to meet their climate goals, however, from 2020 this will not be possible and EUA purchases will be the only option available. If nations choose to take up this loophole option it is likely to anger environmentalists who argue loopholes such as these do nothing to help the environment as no emissions reductions are actually made and it allows sectors to avoid their climate targets.

European Commission review board sign off EU ETS Phase IV review impact assessment

Publication of the draft EU ETS reforms came a step closer last week as the EC's review board signed off the impact assessment which, according to Arias Canete (the EU's climate action and energy commissioner), means the review is more likely to be published as originally planned on the 15th July. This is despite warnings from Mr Canete that it may be delayed until September. The main thing to look out for is the impact that a new ‘leakage list' arrangement will have on free allocations to industrial installations, both for those with a chance of a 100% free allocation and those that will receive less to help out leakage exposed companies. Lower allocations combined with predicted higher prices will cause economic shock to those companies used to no or low costs when it comes to year-end compliance.

The week ahead With the malaise continuing and prices moving sideways it is hard to pick which way the carbon emissions trading price will break, if any. To the downside continued weakening clean dark spreads and the Greek turmoil could weigh heavily. On the upside a Greek resolution and resistance to selling pressure could provide key signals to market participants of strong underlying demand. Another sideways week is also a strong possibility as traded volumes remain low and auctions clear at unremarkable levels.