The German government has been engaging in a lengthy discussion over extending carbon pricing to sectors not currently covered by the EU ETS. The two main sectors mentioned are transport and construction, although the CO2 associated with the manufacture of building materials such as cement, glass and steel are already captured by the EU ETS, suggesting that sector will be small. The end of April saw an acceleration in the importance of these discussions when the German economy minister endorsed the ideas that had been previously proposed by the environment minister. The government now appears to favour applying some form of cap-and-trade regulations on these sectors rather than a carbon tax, but it is concerned about the impacts a carbon price would have on the competitiveness of German business. Given this, the end of last week saw Chancellor Angela Merkel issue a call for such a cap and trade scheme to be implemented by other EU countries in an alliance of ‘willing economies’ against climate change. The call by Merkel for a voluntary opt-in by other countries does suggest that the German government feels it will not be able to push for an expansion of the EU ETS to cover these sectors—at least at the moment. The most efficient way forward would be for Germany to just push for transport emissions to be included in the EU ETS. Another possible way for Germany would be to ‘opt in’ its own installations into the EU ETS, although for transport the overall trading system rules would need to be amended to cover indirect emissions rather than just direct emissions of the installation as the compliance burden will need to be placed on fuel suppliers rather than fuel users. Again, that would require legislative changes at EU level. The next steps here could be important for EUA prices down the road if the German government is able to create any type of link between its own emerging (non EU ETS) ETS and the EU ETS.
|Fig 1: EUA daily moves, €/t||Fig 2: EU total volume of allowances in circulation, Mt|
|Source: Refinitiv, Energy Aspects||Source: EU TL, Energy Aspects|
EU price action
EUA prices spent last week exploring the breadth of the 24-28 €/t range that has been guiding trading for the last few weeks, hitting within-day extremes of 24.5 €/t and 27.2 €/t with little in directional pull either way. On Wednesday (15 May), the European Commission will publish the total number of allowances in circulation (TNAC) for 2018, which is important as it will determine the volume of EUAs that will be removed from the auction pots and put into the market stability reserve (MSR) over September 2019 to August 2020. We estimate that the TNAC for 2018 will be 1.70 Gt, slightly higher than 2017’s TNAC of 1.65 Gt due to large emissions reductions in 2018. The implication is that the MSR will remove around 405 Mt of EUAs from the auction pots and put them in the MSR for the next auction year. The implication for the market this week is likely to be like the other data releases so far this year (such as the verified emissions data release on 1 April)—an event the market notes but not really price-moving. Unless the TNAC comes in radically different than market expectations, we expect no material change in the EUA price levels. Once the TNAC is published and EU countries informed, European Energy Exchange (EEX) will publish a new auction calendar showing the downward revisions for the auctions currently scheduled between September and December 2019. We are also expecting EEX to publish in the coming weeks a revision to the auction calendar to schedule the combined auction volumes for Norway, Iceland and Liechtenstein. While these auctions are widely anticipated, the split between the auction volumes arriving in 2019 and 2020 is still unknown, so the calendar will provide some clarity. For this week, we expect more of the same in terms of EUA prices cycling around the 24-28 €/t range, with relatively bearish power fundamentals likely to keep the market from breaking to the upside.