EU ETS Monthly Report – December 2018

European carbon allowances ended December at €25.01, posting a 200% gain for the year. The much-anticipated expiry of the December 2018 options contract proved anti-climactic, and prices consolidated ahead of a widely-expected surge in January.

The market set numerous records in 2018, including a ten-year intraday high of €25.79 and the largest annual front-year screen traded volume on ICE Futures of more than 4 billion EUAs.

Carbon prices rose in 19 of the last 20 months, and analysts are generally bullish on the prospects for further increases in 2019.

The month of December saw EUA prices continue to recover from the collapse in October and November, rising 21% over the course of the month from €20.63 to €25.01.

Numerous traders began the month positioned for the expiry of the December 2018 options contract. Futures prices centered around the €20 mark for the first two weeks, reflecting the large open interest in options with a strike price at €20.

Once the options had expired, prices began to move upwards sharply and had risen back above €24 by the time the December futures expired on December 17.

Over the holiday period the December 2019 contract, which is now the benchmark for the market, consolidated at around €25 as trading activity fell away.

The outlook for January is generally seen as strong, as the Market Stability Reserve starts operation. The MSR will remove around 40% of all auction supply in 2019 as pat of a multi-year effort to remove the market’s approximately 1.6 billion EUA surplus.

However, additional upside risk has been added by a delay to German auctions, which are expected to resume later in the first quarter. At the same time, UK auctions have been suspended for the first quarter, as the UK government awaits Parliamentary approval of its withdrawal agreement.

Brexit will have a sharp but brief impact on the market, most sources agree. A failure by the UK parliament to ratify the withdrawal agreement may lead to a “no-deal” scenario in which the UK leaves the EU on March 29 without any transitional arrangements in place.

This may trigger a short-term surge of selling of surplus pre-2019 allowances by UK emitters, while others may also transfer allowances to affiliated companies on the continent.

However, if Parliament approves the Brexit deal, this would allow UK companies to continue participating in the EU ETS until the end of the current phase in 2020, and may lead to a slight drop in prices, since the UK is net long EUAs, most sources say.

Participants expect EUA prices to target the recent multi-year high at €25.79, before moving further ahead as the lack of new supply begins to bite.


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