Greenhouse-gas emitters in Europe can generate more cash selling options linked to their spare carbon permits instead of offloading the allowances in the forward market, according to Climate Mundial.
Emitters get a premium of 91 euro cents a metric ton for selling calls on the right to buy June carbon at 5 euros a ton, according to ICE Futures Europe exchange prices as of March 4. That compares with an 8-cent premium for the June futures contract relative to the current spot rate of 4.49 euros a ton.
“If the market goes down, you will have made revenue on selling the call and probably bank the allowance as the buyer won’t exercise,” Daniel Rossetto, director of the carbon market adviser, said in an interview. “The risk to the option seller is they are giving up the upside.”
Most companies with spare allowances have been slow to treat them as revenue-generating assets and are seeking ways to boost returns after carbon prices plunged 52 percent in the past year, Rossetto said. Emissions costs have slumped as Europe’s weak economy damps demand for permits, exacerbating a surplus that European Union lawmakers are struggling to fix.
December EU permits fell to a record 2.81 euros a metric ton on Jan. 24. The contract traded at 4.57 euros a ton on ICE at 10:45 a.m. in London.
Selling calls at strike prices just above the market rate attract a relatively high premium, Rossetto said on Feb. 27. The trade boosts returns because call sellers collect the money paid for the option no matter what happens to the permits. If the price of carbon rises, the seller forgoes any profit beyond the option premium plus the strike price.
Trading in carbon calls has jumped on ICE, with the ratio versus puts surging to a 10-month high of 3.1 last month from 2.6 in January. Calls covering 100.75 million tons of emissions were cleared on ICE in the first two months of the year, 28 percent more than the same period last year.
ICE in London cleared a record 5.5 million tons of options to buy December carbon for 5 euros ($6.52) a ton last month, exchange data show. A further 1 million tons of the contracts changed hands yesterday.
Call options are the right, but not the obligation, to buy assets at a set date and price.
The EU started the world’s biggest greenhouse gas market by traded volume in 2005 to help meet emission-reduction targets under the 1997 Kyoto Protocol. The program auctions or allocates for free allowances to factories and utilities, which must surrender enough permits to cover their discharges of carbon dioxide or face fines.
The bloc gave away about 97 percent of the 10.5 billion tons of allowances in the market through 2012, according to a March 4 estimate by Bloomberg New Energy Finance. That was about 5 percent more than emissions.