Please note that this will be the last Carbon Weekly of 2018. The next edition will be published on 7 January. We wish our readers a prosperous 2019!
The UNFCCC annual climate conference (COP24) finished last week in Poland, with agreement on many technical aspects for implementing the Paris Agreement. The ‘rulebook’ covers the details on how countries’ emissions reduction efforts are to be measured, reported and verified. However, several difficult issues to resolve were pushed to next year’s conference in Chile, including the controversial Article 6, which sets out the role that carbon market mechanisms will have under the international framework. Article 6 does not have a direct influence on domestic carbon markets such as the EU ETS. It will neither facilitate nor detract from the implementation of such markets. Rather, it is about establishing the guidelines for the potential trade of carbon credits between countries and/or regions through well-established protocols for offsetting and how to account for that under the Paris Agreement. One issue of disagreement is how to ensure no double-counting of emissions reductions made under an offsetting mechanism (the new sustainable development mechanism—SDM). Another issue is how to encourage the overall mitigation of global emissions (OMGE) in a way which goes beyond offsetting and encourages emission reductions that will not be used for meeting any parties’ compliance obligations—a sort of gift to the environment. Other issues to be resolved are: how to scale up the amount of finance to reach the $100 billion per year target pledged from 2020 onwards for assisting in the mitigation of emissions and adaptation to the effects of climate change; and how to ensure countries will increase their current emissions reduction efforts for the period out to 2030. While a step forward, the ‘rulebook’ has few implications for the EU ETS out to 2030 and it is highly unlikely EU ETS rules will change to allow SDM offsets as a compliance credit.
|Fig 1: Scheduled EUA auctions per week, Mt||Fig 2: EUA daily price range, €/t|
|Source: EEX, ICE, Energy Aspects||Source: ICE, Energy Aspects|
EU price action
Last week had its fair share of potentially bearish events that the market met without any downwards repricing of EUAs at all, instead closing the week up by 15% at 23.4 €/t. The first event was the scheduled Brexit vote by the UK Parliament on Tuesday (11 December), which ended up being delayed to January, and a subsequent vote of no-confidence in Prime Minister Theresa May, which she survived. The second event was the expiry of EUA call options on Wednesday, which we had expected to bring some downward price pressure. On expiry day, the market opened and failed to move in price over the first half of the day. With the market sensing a sell-off was not materialising, it took that as a very bullish signal. In terms of why the sell-off did not materialise, it may be because the holders of EUA call options had already hedged for expiry, either through call spreads or through futures contracts, leaving unhedged volumes small. Alternatively, it may be that the holders of in-the-money call options are still bullish and were content to hold onto the physical EUAs, even if they are losing the leverage provided by the use of options. Or, it may be because unhedged volumes expire into futures, which only expire today (17 December), so the need to immediately sell on exercise was dampened. While it is likely a combination of all three, the key point from this expiry of an unprecedented level of EUA call option open interest is that this market is still remarkably bullish. For the rest of December, with EUA auctions now taking an annual break over the festive period, we expect the market to move into trading in a higher price range, between 20–25 €/t. With two key potential downward pricing events out of the way for December, the main way is up for the EUA market.