The most ambitious market-based effort to control carbon emissions is being undermined by a glut of permits, amid allegations that European Union ideas to tackle the surplus are being leaked prematurely.
The European Commission plans to propose measures this month to temporarily reduce the excess, after the recession sent prices to a more than four-year low of 5.99 euros ($7.31) a metric ton April 4 on the ICE Futures Europe exchange. Prices jumped 30 percent last month and opened today at 7.72 euros.
Details of the plans, contained in a draft report being drawn up by EU officials, may be ending up in the hands of everyone from national governments and non-government organizations to researchers and traders, said Brett Stacey, the founder of CarbonDesk Group Plc, a renewable-energy financier in London that suspended its emissions-options brokerage in January. That’s sapping trust in the seven-year-old cap-and-trade market, the world’s biggest, he said.
“This information shouldn’t be leaked to certain places in the market because fortunes can be lost, and unless this is realized it could kill the very market they’re trying to protect,” Stacey said in an interview. “Investors will end up leaving the market, as they have no confidence of having the same information.”
The EU program was started in 2005 to help stem greenhouse gases blamed for climate change. Carbon emitted from cars, power stations and factories will need to be reduced by an average of 6 percent a year to stabilize the Earth’s climate by the end of the century, the U.S. National Aeronautics and Space Administration said in April. Putting a price on carbon emissions is the world’s best hope, it said.
Europe’s program has helped. The amount of emissions dropped 2 percent in 2011 in the market. The EU may exceed its goal of a 20 percent cut in the 10 years to 2020, the European Energy Agency said in October.
The recession roiled the market, leaving fewer takers for the allowances. The first phase failed to bite when an oversupply of permits caused prices to collapse to 1 euro cent a ton in 2007. After allocations were cut 9.4 percent, they rebounded, surpassing 29 euros a ton in 2008.
Regulators will next year ban certain types of United Nations emission credits from emerging nations that have made up more than half of supply under the Clean Development Mechanism program developed under the 1997 Kyoto Protocol.
The EU market will probably still be oversupplied by the equivalent of a year’s total allowances by 2020, Barclays Plc forecast on June 22.
Other regions are further behind the EU on climate protection. Cap-and-trade legislation stalled in the U.S. Senate after narrowly passing the House of Representatives in 2009. North American discharges fell 1.3 percent last year amid slowing economic growth. In China, the world’s biggest emitter, greenhouse gases from fuel use rose more than 9 percent in 2011, according to BP Plc statistics published on June 13.
Criticism of disclosure practices isn’t new in the EU market. In the second half of April 2006, 15 months after its start, permit prices dropped 57 percent after a series of nations revealed surpluses individually. That prompted complaints that countries didn’t disclose emissions output to the whole market. Calyon, part of Credit Agricole SA, called it a “farce” at the time.
“At the beginning of the market, many years ago, information was released piecemeal and there were leaks,” Andrei Marcu, head of the Centre for European Policy Studies’ Carbon Market Forum, said today by e-mail. “This is now not about information being leaked, but about the fact that this is the EU process, which is a complex political and regulatory model that most market actors find frustrating. I think that the market information is well handled.”
Carbon allowances dropped 1 cent today to 7.65 euros a ton on ICE in London, the lowest close since June 21.
The permits plunged to their lowest since 2007 this year two days after the commission on April 2 released preliminary annual data from about 13,000 factories and power stations in the program by offering access to a spreadsheet on its website. As in previous years, it was incomplete and didn’t provide any written summary. Emissions-output information from the U.K. was released the week before the EU-wide figures. Final numbers for the program were published May 15, more than a month later.
On June 15, as regulators sketched out three scenarios in the draft report to temporarily curb the oversupply, the price of call options to buy that month’s carbon futures for 7 euros more than doubled to 42 cents a ton, according to ICE Futures Europe exchange data.
The June futures advanced 5.7 percent that day to close at 7.23 euros. Last month’s 30 percent jump for the December benchmark was the best performance among 80 commodities tracked by Bloomberg.
Unless data that drives prices is evenly distributed at the same time, the market will become less attractive, said Stacey, a former deputy chairman of the South African Futures Exchange who has been trading equities, commodities and currencies for more than 30 years. He wasn’t trading in the carbon-options market last month, he said June 20 in an interview in London.
Information circulating in June contained scenarios in which the commission would temporarily withhold emissions permits, said Simone Ruiz, the European policy director at the International Emissions Trading Association in Brussels. Whether the information was market-sensitive is uncertain, she said.
“It could’ve made prices go either way,” Ruiz said. “It was well-known in the market this was being discussed.”
Traders who pay the closest attention to regulatory developments may “know a little bit more than others,” she said. “We would very much welcome a discussion around the definition of insider information in the context of the supervision of carbon markets.”
One of the scenarios, the temporary removal of 1.2 billion tons of allowances, equal to 55 percent of 2012 supply, would more than double prices to about 20 euros in 2015, Bloomberg New Energy Finance said June 18. A temporary cut of 400 million tons may boost prices to about 12 euros, it forecast.
The report and the proposal will be published before August, EU Climate Commissioner Connie Hedegaard said last month. The commission is said to have applied confidentiality measures to ensure the proposal won’t leak, according to two people familiar with the matter.
The draft measure has been qualified as restricted, is in paper copies that can be traced and available to a limited number of commission officials, said the people, who declined to be identified because the information isn’t public. The draft doesn’t include numbers, which are being discussed in internal commission talks, and will be inserted in the text before publication, they said.
“The market would be better served if there were coordinated releases of information rather than leaks to selected people,” Louis Redshaw, head of carbon trading at Barclays in London, said by phone June 22. Isaac Valero-Ladron, a spokesman for the commission, didn’t return calls and emails seeking comment today.
Regulators are seeking to better define and police insider trading in commodities and energy markets. The European Agency for the Cooperation of Energy Regulators has delayed until the second half of this year the publication of guidance on how utilities including RWE AG and GDF Suez SA should report data on power and natural-gas outages.
Trading in “calls” linked to the June emissions future increased to 2.1 million tons in the week ended June 15, from 500,000 tons the week before, according to data compiled by Bloomberg. Calls are options that give the buyer the right to purchase at a certain price.
The options, which expired June 20, surged to 61 cents a ton on June 19 from 18 cents June 8, according to ICE data. Options contracts are cleared on ICE after being brokered over the counter at prices that may not be disclosed.
Claire Miller, a London-based spokeswoman for ICE, declined to comment on whether the exchange was investigating the trades. Chris Hamilton, a spokesman for the U.K.’s Financial Services Authority, said the FSA never confirms or denies whether an investigation is taking place.
“It’s an EU problem, not a carbon-market problem,” said Mark Owen-Lloyd, head of emissions trading at CF Partners (U.K.) LLP in London, which manages allowances on behalf of clients. There are so many people privy to potentially market-moving information, he said in a June 22 interview.
“In a disciplined organization there are channels, whereas the EU is a collection of individual politicians and officials and many people talk,” he said. “At the end of the day it’s still rumor, until it’s done.”