EU Spot Carbon Trade Surges as Factories Seek Futures Contracts

Trade in European Union carbon permits for prompt delivery rose yesterday to the most in more than three years as factories swapped spot allowances for futures to guarantee their eligibility after April.

ICE Europe Futures yesterday handled more than 7 million Phase 2 permits for day-ahead delivery, according to exchange data. That may include permits that changed hands in the over-the-counter market and were cleared by ICE. That’s the most since July 28, 2009, when 7.4 million spot contracts were handled by ICE Futures and NYSE Euronext’s Bluenext exchange, which stopped trading on Dec. 5.

Factories and power stations in the EU’s emissions-trading system have until April 30 to surrender allowances matching their carbon-dioxide output for 2012, the last year of the market’s second phase. The European Commission, the bloc’s regulator, will swap the permits for Phase 3 allowances after that date. Some emitters may be selling allowances from their accounts and buying Phase 3 futures to avoid the exchange, according to Jan Fousek, head of trading at Virtuse Energy s.r.o. in Prague.

“Companies may be selling spot permits and buying futures to avoid the bureaucracy associated with the shift from Phase 2 to Phase 3,” he said by e-mail today. They may also be selling spot permits to generate cash rather than borrow at commercial interest rates, he said.

Spot Phase 2 permits declined 8.6 percent yesterday to 4.56 euros ($6.10) a metric ton on ICE Futures, after earlier falling as much as 17 percent. December futures dropped 8.6 percent to 4.68 euros yesterday. Aggregate open interest in all futures grew by more than 16 million tons, some of which was due to the so-called spot-futures roll, Fousek said.

“We may see more such rolling as the deadline for 2012 compliance nears and the eligibility of Phase 2 permits runs out,” he said. “Industrial clients usually wake up when an opportunity is about to disappear.”

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