EU Emission Slump Tests Brokers: Carbon & ClimateAlessandro Vitelli and Mathew Carr
As Europe’s recession recedes, trading via brokers in the $74 billion carbon emissions market is plunging amid a record glut in the commodity Richard Sandor once predicted to reach the highest volume in the world.
Brokers’ share of the market slumped to an all-time low of 10 percent this year, from 30 percent in 2012, according to CME Group Inc. As middlemen from ICAP Plc to GFI Group Inc. lost ground to regulated bourses, fees dropped to as low as 0.5 euro-cent (0.69 U.S. cent) a metric ton from 20 cents a decade ago, said Andy Ager, the head of carbon at Vertis Environmental Finance Plc in Budapest.
The cost of emitting one ton of carbon dioxide in Europe fell 83 percent since 2008 as the financial crisis cooled industrial demand, aggravating a glut already fueled by policy makers’ handing out more allowances than polluters needed. The decline prompted about half of London’s more than 30 brokers to leave the market in the past five years, said Louis Redshaw, the former head of carbon and coal at Barclays Plc.
“Brokers aren’t charities,” said Steve Drummond, the former head of CantorCO2e, a carbon brokerage bought by BGC Partners Inc. in 2011. “People need to make a living. To make a living you need turnover.”
EU benchmark carbon allowances more than doubled from a record low of 2.46 euros a ton in April to close at 5.03 euros today on ICE Futures Europe in London. The contracts traded as high as 31 euros in April 2006. They will probably more than double to at least 10 euros by the end of next year, according to Bloomberg New Energy Finance in London. Each permit covers a ton of carbon dioxide.
Sandor, who helped invent interest-rate futures more than 30 years ago and was the founder of Climate Exchange Plc in London before selling it to Intercontinental Exchange Inc., said in December 2009 that carbon dioxide will become the world’s largest traded commodity as governments curtail emissions of greenhouse gases that scientists say cause global warming. Crude oil is currently the biggest traded commodity.
Brokers handled 114 million metric tons of EU emission permits in November, 61 percent less than the same month last year, according to data from the London Energy Brokers’ Association, an industry lobby group. Their market share was 14 percent, from 27 percent a year earlier, LEBA and exchange data show. Exchanges handled 689 million tons last month, 11 percent less than the 776 million tons in the same month last year, bourse data show.
Emissions from factories and power stations in the EU, excluding those from airline flights, dropped about 12 percent in the four years through 2012 to 1.87 billion metric tons, according to data from the European Commission and Bloomberg New Energy Finance. Euro-area gross domestic product declined 9.9 percent in the same period, according to World Bank data.
European politicians have struggled for three years to rescue the region’s eight-year-old carbon market, the biggest cap-and-trade system. The program allocates or sells allowances to about 12,000 factories, utilities and airlines that must surrender enough permits to match their emissions. Those that emit less can sell the securities they don’t use.
ICAP, the biggest interdealer broker, says carbon trading will only improve with tighter regulation. The system would lure more traders and investors if there was a central authority regulating the supply of permits, said Paul Newman, the managing director of ICAP Energy in London. Currently, the EU sets supply years in advance and makes no attempt to adjust it according to economic activity.
“This is a well-recognized feature of foreign-exchange markets, for example, and it’s an important way in which order and stability are preserved,” Newman said by e-mail in October. “The EU emissions trading system will only become a meaningful and efficient environment for trading of emissions when the market as a whole has proper oversight.”
“The idea that we should have a central bank to manage allowances was not supported” in a consultation carried out by the European Commission, Jos Delbeke, director-general for climate at the commission, said Dec. 10 at a Center for European Policy Studies seminar in Brussels.
At least 10 banks and brokers including JPMorgan Chase & Co., Tradition Financial Services and UBS AG closed or reduced their emissions trading businesses since 2008, according to a report last month by the Institute for Public Policy Research in London. GFI, the New York-based interdealer broker, closed its carbon desk in London this year, transferring the business to other teams, according to two people with direct knowledge of the matter.
EON SE, Germany’s biggest utility, said last month it reduced trading for its own account before new EU rules that seek to increase transparency and lower the default risk in derivative trading come into force in February.
Such buying and selling has come under increased scrutiny from regulators calling for more transparency and increased default-risk protection, according to the European Securities and Markets Authority. Energy traders will have to report non-exchange traded derivative deals and have them cleared if volumes exceed 3 billion euros under the European Market Infrastructure Regulation, which hasn’t yet defined which derivative contracts fall under the threshold.
“Regulation of commodity markets has taken its toll” on the region’s greenhouse gas program, said Redshaw, the former Barclays trader. A surge in the volume sold at carbon-permit auctions means buyers rely less on brokers, he said. Utilities and banks needing allowances used the middlemen to find supply that they now source from those almost-daily sales.
The number of brokerages serving the carbon market may shrink to two or three in a year, from more than six today, said John Molloy, head of environmental products at Tradition Financial Services in London. Some recovery is plausible as the EU considers tightening its emission limits for 2030, said Molloy, a carbon broker for 12 years.
The EU is considering a target to cut emissions by 40 percent below 1990 levels by 2030, compared with a 20 percent reduction for 2020, according to a European Commission document obtained by Bloomberg News.
“If the EU were to pass an ambitious 2030 framework for climate and energy policy, that would change the playing field completely,” said TFS’s Molloy. “Tighter emission targets in Europe will undoubtedly lead to higher pricing for carbon and likely garner a strong uptake in trading activities and subsequent involvement for the brokers.”
Emissions-trading jobs have all but disappeared, according to Peter Henry, head of front office research at Commodity Search Partners in New York. He helped place about 20 carbon traders and originators in 2007 and 2008 with clients that include banks and utilities.
“I haven’t worked on a carbon emissions mandate since 2009,” Henry said by phone on Nov. 8. “We’re keen for a bit of buoyancy to return to these markets.”
The surplus of permits in the EU market swelled to a record 2 billion tons at the end of last year, including United Nations emission credits, according to the EU. It will probably widen to
2.2 billion tons by the end of 2013, New Energy Finance estimates.
To reduce the glut, the European Commission plans to delay the sale of 900 million permits, or about half the total annual limit for companies in the program and return them to the market at the end of the decade. The plan was endorsed Dec. 16 in a vote by European nations.
As a more permanent fix, the regulator may propose next month a market stability reserve to ensure supply and demand don’t swamp each other in the future, Delbeke said.
The reserve system would add or release allowances from future auction volumes and may require the central authority being endorsed by ICAP and others including Accenture Plc.
“It’s important that new regulatory solutions enhance market efficiencies while minimizing unintended consequences such as a reduction in liquidity or dramatically increased costs,” Claire Miller, a spokeswoman for ICE in London, wrote in an e-mail Oct. 24.
Even as the EU seeks to fix its market, the five biggest nations by population -- China, India, the U.S., Indonesia and Brazil -- are considering markets to help protect the climate.
A text adopted Nov. 23 at UN climate talks in Warsaw set out steps toward the next agreement on reducing emissions. Envoys aim to adopt the package in 2015 and bring it into force from 2020, replacing the Kyoto Protocol. There’s no guarantee that deal will include carbon trading, according to Anja Kollmuss, an emissions trading specialist at Carbon Market Watch, a Brussels environmental lobby group.
“The people who helped build the market are gone. That’s sad,” said Mark Meyrick, the head of carbon trading at Eneco Energy Trade BV in Rotterdam and a carbon trader since 2004. “In the early days the brokers were really important for getting buyers and sellers together and providing information and prices. They built the market up from 125,000 tons a day to what it is now.”
Average daily volume of EU permits traded over the past 12 days was 39 million tons, according to data from ICE, the market’s biggest exchange.
“With the collapse in prices, the carbon market has become a virtual tax,” Meyrick said. “People don’t trade taxes. The side effects of low prices include that trading and broking desks are closing.”