European carbon

Published at 12:30 14 May 2018 by . Last edited 15:12 5 Nov 2018.

On Tuesday, the European Commission will announce how many surplus EUAs are in circulation. The total number of allowances in circulation (TNAC) is the basis on which the injection percentage for the market stability reserve (MSR) is multiplied to determine the volume of EUAs that will be taken out of auctions in 2019. The MSR injection rate for 2019-2023 is set at 24% of the TNAC. We estimate that TNAC will come in around 1.67 Gt, based on the sum since 2008 to 2017 of all EUAs allocated and auctioned, plus Kyoto offsets submitted, less all verified emissions. It would mean the volume of allowances to be removed from the auction pot and injected into the MSR in 2019 would be just over 400 Mt. None of this is news for the market, as it is the promise of a significant reduction in primary supply in 2019 that has driven the strong price moves seen in the market so far this year and further buying in anticipation of the announcement is unlikely. Having taken a short break from the steady upward trend in April, EUAs broke above 14 €/t level early last week and closed for three sessions above that mark. It now looks like the market has gone from seeing 14 €/t as a level of resistance to now seeing 14 €/t as a level of support. Given the market’s bullishness, and with both coal and gas being bid up, some support would have been seen in the implicit price level needed to achieve fuel switching. It is from this source that the market will increasingly take directional guidance, and with gas supply now looking more constrained in the European market given a number of gas supply developments, calling a halt to the upward trend in EUAs anytime soon still seems difficult. Tomorrow’s TNAC announcement is only likely to remind the market just how tight 2019 is likely to be.

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