EU Carbon Market Has First Volume Drop Amid Supply Cut

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Buying and selling of European Union carbon allowances on ICE Futures Europe declined for the first time last year after the bloc began withholding supply to reduce a surplus that’s built up since 2008.

Trading slipped 5.2 percent, according to data from the exchange compiled by Bloomberg. Benchmark prices rose 48 percent in 2014 and averaged 6.01 euros ($7.24) a metric ton.

Lawmakers took more than three years to install the first measure aimed at reducing the surplus, beginning last March to retain the equivalent of six months’ permit supply temporarily. They are now discussing a permanent remedy. Activity also slowed as banks exited trading of commodities including carbon, according to Andrei Marcu, head of the carbon-market forum at the Centre for European Policy Studies in Brussels.

“The delayed decision on the market’s future is not helping,” Marcu said by phone Dec. 31. Companies from cement makers to utilities to car manufacturers “still need a strong signal that the political will goes beyond declarations.”

Volume across all EU carbon futures contracts fell to 6.88 billion tons on ICE last year from 7.26 billion tons in 2013. The 2014 figure is still the second-highest ever for a market that started in 2005 as the main policy to help Europe meet commitments made under the 1997 Kyoto Protocol.

Analyst Estimates

The price of emission rights will rise another 62 percent by June 30, according to the median of 16 trader and analyst estimates compiled by Bloomberg last month. UBS Group AG said Oct. 2 carbon permits might climb as high as 15 euros in 2015.

James Dunseath, ICE spokesman in London, declined to comment when contacted by e-mail.

Benchmark allowances fell as much as 3.5 percent today to 7.08 euros a ton on ICE as German power for delivery in 2016 dropped to a record 32.35 euros a megawatt-hour, according to broker data compiled by Bloomberg. Lower electricity prices can discourage utilities from selling power forward, curbing demand for carbon contracts typically used as a hedge.

To reduce the accumulated excess of more than a year’s carbon supply, the EU proposed introducing a market stability reserve in 2021 that would adjust the amount of allowances auctioned. Contracts would be removed from the market and put in the reserve if supply exceeded a fixed limit and returned in the event of a shortage.

Interim Policy

The bloc already began withholding 900 million tons of permits last year under the interim measure, called backloading because supply is to return to the market at the decade’s end.

Volumes slid partly because factories declined to participate in the market last year amid a lack of clarity about future rules, Matteo Mazzoni, an analyst at researcher Nomisma Energia Srl in Bologna, Italy, said Dec. 1.

ABN Amro Bank NV, the Dutch state-owned lender, said in June it was withdrawing from the carbon market after prices slumped. Other banks to withdraw or scale back on emissions trading include Deutsche Bank AG and Barclays Plc. Still, the value of trading in the world’s biggest greenhouse-gas market surged about 26 percent last year to 41.3 billion euros based on average prices.

Banks’ reduced focus on carbon reflects a general scaling-back of interest in “non-core commodities,” Trevor Sikorski, an analyst in London at Energy Aspects Ltd., said Dec. 31 in an e-mailed response to questions. Some hedge funds have a limited appetite after levels of volatility decreased, while others are taking a “once burned, twice shy” view, he said. The Bloomberg Commodity Index of raw materials slumped 17 percent last year.

Last year’s jump in the EU carbon price still leaves allowances nowhere near the 40 euros a ton needed to spur German utilities to favor natural gas over dirtier coal, according to a Bloomberg calculator.

“We need an outcome sooner rather than later,” said Marcu at CEPS. “It is unlikely that we can get another chance at EU emissions-trading-system reform.”