EU’s Record Carbon Glut Poses Risk for Auctions: Energy Markets

Europe’s carbon prices may sink to a new low as political wrangling over a plan to cut a record glut of permits in the world’s biggest cap-and-trade market risks deterring investors from national auctions.

Germany, Europe’s biggest emitter, sold 5.03 million permits today via the European Energy Exchange AG with the lowest bid ratio in four weeks after canceling a Feb. 22 auction, the Leipzig-based bourse said. Prices may slide more than 30 percent to below 3 euros ($3.91) a metric ton unless European Union policy makers can convince traders the surplus can be fixed, according to Jefferies Group Inc.

Carbon has plunged more than 85 percent in the past five years as the euro area’s second recession since 2008 cut industrial demand for permits. Nations from Germany to Greece began this year selling more than 40 percent of their allowances in auctions instead of giving them away for free. Failed auctions may push the cost of emitting one ton of carbon dioxide into the atmosphere even lower as unsold credits in EEX auctions are held over for the next four sales .

“The problem with failed auctions is it creates a vicious cycle,” Matthew Gray, an analyst at Jefferies in London who correctly forecast in June 2012 that prices would average 7 euros last year, said by e-mail. “Either Brussels sends a meaningful signal to the market that the fix is on the way, or prices will fall below 3 euros again.”

Price Fall

European allowances for delivery in December fell to a record 2.81 euros a ton on Jan. 24 and closed today at 4.67 euros on ICE Futures Europe exchange in London. The contract exceeded 36 euros in 2008.

Carbon rose as much as 13 percent yesterday after a German lawmaker said Chancellor Angela Merkel’s view on the EU emissions trading system, also known as ETS, “is the same as” Environment Minister Peter Altmaier’s. He advocates strengthening of the program and supports a proposal by the European Commission plan to temporarily cut supplies of new allowances in the 54 billion-euro market.

The surplus almost doubled to 887 million tons last year, Bloomberg New Energy Finance in London estimated on Feb. 4. That compares with 1.96 billion tons emitted by the 12,000 installations owned by factories and power plants included in ETS, according to estimates by New Energy. Preliminary data for 2012 will be published in April.

The commission’s plan, called backloading, involves withholding 900 million tons of allowances over the next three years and then distributing them in 2019-2020. The proposal needs consent by national governments and the European Parliament.

Climate Protection

Europe is set to auction 819 million allowances this year, more than 40 percent of all the permits allocated, according to commission estimates. The share of auctioned permits will increase in coming years, with some of the revenue going to member states to help fund climate-protection efforts.

“The EEX and their sellers have to decide whether these auctions should continue while the future of the ETS remains so uncertain,” said Mark Owen-Lloyd, co-founder of Leap Trading Ltd., a London-based proprietary investment firm. “This is the market sending Brussels a little reminder, as they did at 2.80 euros, that this phase is massively oversupplied and the price without backloading is probably 1 euro.”

EEX has “absolutely no say in whether or not the auctions go ahead,” Eileen Hieke, a spokeswoman for the exchange, said today by e-mail.

Feb. 22 Failure

The German auction today included a portion of the 4.02 million tons the nation failed to sell on Feb. 22. That was the second failure this year, after bids didn’t meet the secret reserve level. The ratio of total volume of bids to the number of permits in today’s sale dropped to 2.18, the lowest since Jan. 23 and 24 percent less than yesterday’s EU sale. A higher bid ratio reflects greater demand for permits.

The price was 4.64 euros, according to EEX. The auction took this week’s EU total emission sales to a record 21.5 million allowances, EEX and ICE Futures data show.

Auctions can be canceled when the clearing price is “significantly” below the prevailing market rate as bids are submitted, after accounting for “short-term volatility” in prices over a “defined period preceding the auction,” according to EU rules, which don’t specify the time frame. The way the reserve price is set is secret and is the seller’s responsibility, the commission said Feb. 27 in a response to Bloomberg questions.

‘Different Methods’

“Different methodologies are possible” for setting the reference price for German auctions and common sales by other EU governments, Katrin Berken, a spokeswoman for EEX based in Leipzig, said in a Feb. 27 e-mail. She declined to comment on specific rules. Officials at Germany’s environment ministry weren’t available to comment.

Two of Germany’s six auctions this year were the only ones to fail, while all 24 of the EU’s sales succeeded, as did four offerings from the U.K.

The debate over backloading has reached “over proportionate dimensions,” said Tuomas Rautanen, head of regulatory affairs and consulting at First Climate in Zurich.

“Backloading is fine-tuning and it’s a pity that this fine-tuning is distracting attention from the much more important and fundamental discussion about the 2030 target-setting, which has already started within the commission,” he said by e-mail.


The parliament, which is debating the backloading measure, decided on Feb. 25 to scrap a fast-track approval procedure. Prices slid the most in a month, or 12 percent, that day. Lawmakers are next scheduled to vote on the proposal at a plenary meeting on April 15.

Failed auctions are “another clear message” that lawmakers need to take action to strengthen the ETS, according to Isaac Valero-Ladron, a climate spokesman for the commission in Brussels.

“There are too many allowances in the system,” he said Feb. 27 by e-mail. “The market seems not to be able to digest this big surplus. The ball is now in the European Parliament’s court to approve our backloading proposal.”

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