WORLD EMISSIONS MARKET DEMONSTRATES RESILIENCE

EU carbon hits 12-week high as buyers return
Michael Szabo (w/Sue Thomas), April 9, 2009 (Reuters)

SUMMARY
Having tracked downward with the rest of the world’s markets and the global economy, the European Union (EU) Emissions Trading Scheme (ETS) and associated emissions markets have begun rising. At the end of the week EU allowances reached their highest level since mid-January.

December EU Allowances were as high as 13.50 euros/tonne (up 71 cents, 5.6%) before falling back slightly and closing at 13.16 euros. The volume of 2,108 lots was considered “strong.”

Since reaching an all-time low of 8.05 euros/tonne February 12, the EUA price has risen 65%.

Investors were identified as “a mixed bag” of banks and utilities.

Associated market prices: (1) U.S. crude oil futures were up $1/barrel; (2) German Cal '10 baseload power, (i.e., power generation futures) was unchanged at 50.60 euros/megawatt-hour; (3) Certified Emissions Reductions (CERs), the United Nations-certified offsets, were also up, though less than EUAs, only 31 cents (3%), to 10.76 euros/tonne.

The international emissions trading "big board." (click to enlarge)

COMMENTARY
The EU ETS is the world standard in emissions trading. It has had successes and failures and the price of a tonne of carbon dioxide equivalent is at present still too low to stimulate the kind of shift in consumer habits needed to reverse global climate change. Nevertheless, for EU leaders to have created such a marketplace in less than 5 years is an achievement worthy of recognition.

An often-overlooked achievement of the ETS is that it has kept EU power prices in control while at the same time beginning to generate revenues with which to build New Energy and Energy Efficiency.

The first fews months were tough. (click to enlarge)

The EU opened its cap&trade market for business in 2005, to enormous price fluctuations and loud nattering-class dissatisfactions. But the European Commission (EC), guiding body to the EU, eventually identified the sources of instability and failure and worked them out of the system.

Perhaps the biggest lesson learned by the ETS was the dangers of making allowances free to big emitters. The EC had hoped to seduce power companies and utilities into the system by making their caps loose and giving them enough free allowances to unburden their participation. But the free allowances suppressed the per-tonne price. The result was a cost for emissions so cheap it failed to discourage them. At the same time, the big emitters could sell their free allowances into the market to raise cash and then watch prices fall further in the oversupplied marketplace, making their actual emissions even cheaper. The power companies and utilities were making profits both coming and going from the market.

EUAs on the rise. (click to enlarge)

In the 2007-08 period, the EU ETS began leveling off as it entered its second phase. It withheld more allowances for auctioning and the price rose and stayed up. The EC began looking forward to tightening caps and extending them more rigorously to industries heretofore not included.

Through that period, emissions reductions in the EU were not as good as the cap&trade system’s designers would have hoped, though it is impossible to be sure how much emissions might have gone up in the absence of the system.

In recent months, the system has been disrupted as much by the global financial crash as any other market. In addition, the system turned up a new weakness. As demand for power and manufactured goods fell, emitters once again could dump allowances for cash, this time because they did not anticipate generating emissions for which they would require them.

This recent news of an upturn in the EU ETS, indicating the resilience of a mature market, is a very hopeful – if momentary – indication. It suggests a market that is, yes, vulnerable to fluctuations, unforeseen financial circumstances and schemers. That is the nature of markets. In exchange, the EU is hoping to get a marketplace-neutral judgment about the best technologies and best practices for emissions reductions.

When the malicious are restrained by regulation and the ambitious use their money to inspire creativity, there can be a genius in the marketplace like no other.

The long downward trend is finally interrupted. (click to enlarge)

As the EU prepares to set new caps on member emissions, it is once again coordinating with the United Nations Framework Convention on Climate Change (UNFCCC) to tighten caps, extend them to more industries, fight international deforestation and find a way to help emerging economies control their worsening emissions without compromising their economic growth.

The EU has committed itself irrevocably to the cap&trade solution to global climate change. The Obama administration remains committed to bringing the U.S. in, though recalcitrant political opponents are doing everything they can to falsely characterize Obama’s plan as a huge tax, a huge federal giveaway, a corporate welfare plan, a Wall Street welfare plan and a deadbeats’ welfare plan.

If Europe and the U.S. can achieve some degree of unanimity on how to proceed, it is very possible they can convince the Chinese, Indians, Brazilians, Indonesians and other emerging economies to participate on the basis of some kind of technology exchange. This would be to the benefit of the entire world's climate.

The EU has done and continues to do yeomanly work at the first effective task to climate control, a stable and resilient emissions trading marketplace and progressively tightening hard caps on emissions.

UNFCCC offset credits are on the rise, too. (click to enlarge

QUOTES
Unnamed emissions trader: "We're at a key level at the moment, near previous highs, and depending on where it closes we might expect further gains in the next few days…There [is] a lot of congestion around these levels, but if it closes around here, I think that would be considered a breakout…"