EU ETS Monthly Report – January 2019

The carbon market’s strong rally into the end of 2018 came to a sharp stop in January, as EUAs failed three times to breach the September high of €25.79. The December 2019 futures contract ended the month down almost 11% from the December 31 close at €23.30.

The extreme volatility of the fourth quarter, mainly the result of options hedging, gave way to a slightly calmer environment, though traders were quick to exploit opportunities to drive prices higher mid-month. The failure to top the existing  ten-year high then triggered selling as speculative traders liquidated positions.

The market was also characterised by a growing flow of bearish news and sentiment. The ongoing trade disputes between the US and various countries appears to be making itself felt in worsening economic prospects: US and German business confidence took a knock this month, while the US Federal Reserve displayed a new-found caution in its interest rates policy, preferring to hold rates stable and wait for further data.

Fundamentals in the carbon market also shifted this month. In 2018 coal-fired power was the more profitable choice in the benchmark German market, but as the new year started, natural gas prices have fallen back amid plentiful global LNG supply, and this has rendered gas-fired power competitive for calendar 2020 and 2021.

Coal prices, too, have not helped. API2 calendar 2019 coal prices rose into the $90s in October last year, but fell back to the low-mid $80s quickly after that, and there has been little reason for them to rise since.

As a result, utilities are reluctant to sell forward power from coal plants, and this has damped demand for EUAs. There may also be an element of reduced demand ever since RWE announced that it was financially covered for carbon until 2023: other utilities will no doubt have followed suit.

Weather has also been a factor in January. Temperatures have not dropped to significant below-average levels, and this has hurt demand for heating. The weather outlook for February is still fluid, but there remain chances of a prolonged cold snap, meteorologists say.

Supply in February will be boosted by the resumption of weekly German EUA auctions, which will increase total February availability to 51.6 million EUAs compared to 38.8 million in January.

Despite the additional auction supply, there are some participants who hold a slightly bullish outlook for the month, however. Analysts calculate the market balance as short by more than 10 million EUAs in February, which could boost prices. At the same time, compliance buyers will be on the look-out for opportunities to buy cheap carbon, and this may mitigate downward price potential.

Climate Change Impacts and Water Crises among Top Five Risks in 2019, according to WEF’s Global Report

Climate Change Impacts and Water Crisis are among Top Five Risks in 2019, according to the 14th edition of the annual report carried out by The World Economic Forum (WEF).  ‘The Global Risks Report 2019’ evaluates the current global risk landscape and identifies areas for action in 2019.

The report presents the results of the WEF’s latest Global Risks Perception Survey, which surveyed nearly 1,000 decision makers from the public sector, private sector, academia and civil society who identified extreme weather and climate change policy failures as the gravest threats over the next decade. The report urges governments and organizations to address the impact of specific threats and make preparations to contain potential fallout should they occur.

The report lists extreme weather events, “failure of climate change mitigation and adaptation,” and natural disasters as the top three risks in terms of likelihood. In terms of impact, weapons of mass destruction top the list, followed by failure of climate change mitigation and adaptation, extreme weather events, water crises and natural disasters.

The report also finds that risk of infectious disease outbreaks rivals that of climate change, with risks of outbreak increasing significantly over the past 30 years and nearly 200 epidemic events occurring every year since 2011.

The report further describes the ways in which the risks are interconnected and have the potential to affect each other. For example, biodiversity loss in the human food chain affects health and socioeconomic development, with implications for productivity and regional security, among others. Additionally, challenges and risk related to climate change, extreme weather and water stress, for example, require a holistic approach to tackle multiple hazards and build the resilience of basic infrastructure.

You can download the report here

The world can maximise chances of avoiding dangerous climate change by moving to a circular economy

The world can maximise chances of avoiding dangerous climate change by moving to a circular economy, reveals a report from impact organisation Circle Economy.

It highlights the vast scope to reduce greenhouse gas emissions by applying circular principles – re-use, re-manufacturing and re-cycling – to key sectors such as the built environment. Yet it notes that most governments barely consider circular economy measures in policies aimed at meeting the UN target of limiting global warming to 1.5°C.

The Circularity Gap Report 2019 finds that the global economy is only 9% circular – just 9% of the 92.8 billion tonnes of minerals, fossil fuels, metals and biomass that enter the economy are re-used annually.

Climate change and material use are closely linked. Circle Economy calculates that 62% of global greenhouse gas emissions (excluding those from land use and forestry) are released during the extraction, processing and manufacturing of goods to serve society’s needs; only 38% are emitted in the delivery and use of products and services.

Yet global use of materials is accelerating. It has more than tripled since 1970 and could double again by 2050 without action, according to the UN International Resource Panel.

The report calls on governments to take action to move from a linear “Take-Make-Waste” economy to a circular economy that maximises the use of existing assets, while reducing dependence on new raw materials and minimising waste. It argues that innovation to extend the lifespan of existing resources will not only curb emissions but also reduce social inequality and foster low-carbon growth.

Fundamental principles of a circular built environment include:

  • Financing and investment decisions which recognise the long-term and future value of built assets;
  • Reusing existing building materials;
  • Modular design of new building materials to allow for re-use and re-assembly;
  • Alternatives to carbon-intensive materials such as cement;
  • Optimising the lifetime of buildings and designing them for flexible use

You can read the full report here

World Bank Group Announces $50 billion over Five Years for Climate Adaptation and Resilience

The World Bank Group launched its Action Plan on Climate Change Adaptation and Resilience. Under the plan, the World Bank Group will ramp up direct adaptation climate finance to reach $50 billion over FY21–25. This financing level—an average of $10 billion a year—is more than double what was achieved during FY15-18. The World Bank Group will also pilot new approaches to increasing private finance for adaptation and resilience.

The increase in adaptation financing will support activities that include:

  • Delivering higher quality forecasts, early warning systems and climate information services to better prepare 250 million people in at least 30 countries for climate risks;
  • Supporting 100 river basins with climate-informed management plans and/or improved river basin management governance;
  • Building more climate-responsive social protection systems; and
  • Supporting efforts in at least 20 countries to respond early to, and recover faster from, climate and disaster shocks through additional financial protection instruments.

In addition to boosting finance, the Plan will also support countries to mainstream approaches to systematically manage climate risks at every phase of policy planning, investment design, and implementation.

The Action Plan builds on the link between adaptation and development by promoting effective and early actions that also provide positive development outcomes. For example, investing in mangrove replanting may protect a local community against sea level rise and storm surges, while also creating new opportunities for eco-tourism and fisheries. Early and proactive adaptation and resilience-building actions are more cost-effective than addressing impacts after they occur.

The Action Plan also includes the development of a new rating system to create incentives for, and improve the tracking of, global progress on adaptation and resilience. The new system will be piloted by the World Bank in FY19-20 and rolled out to projects in relevant sectors by FY21.

You can download the plan here


Global natural disasters cause $160 billion in damage in 2018

Global natural disasters caused $160 billion in damage in 2018 and climate change was a factor in the final tally, a new report released by German Insurance Company Munich Re says. In its annual report, the company estimates the cost of disasters that include weather events like tornadoes and hurricanes, wildfires, tsunamis and earthquakes.

As with the previous year the United States suffered the heaviest losses from disasters globally. Wildfires dealt $24 billion of damage in California, while Hurricanes Florence and Michael accounted for a combined $30 billion.

Also, Japan hit by an unusually high number of natural catastrophes. In 2018 Japan suffered at the hands of both weather-related disasters and geophysical natural catastrophe, including at least seven typhoons that either skirted or hit the country’s islands. The costliest was Typhoon Jebi with overall losses of $12.5 billion, making it the fourth costliest worldwide.

Another important data that we can highlight is that Europe was spared dramatic one-off disasters in 2018, but a long summer drought inflicted around $3.9 billion in direct losses, especially in agriculture.

Munich Re notes that human-caused climate change is playing a role in the devastation felt worldwide from disasters.

“2018 saw several major natural catastrophes with high insured losses. These included the unusual phenomenon of severe tropical cyclones occurring both in the U.S. and Japan while autumn wildfires devastated parts of California. Such massive wildfires appear to be occurring more frequently as a result of climate change. Action is urgently needed on building codes and land use to help prevent losses”, Munich Re Board member Torsten Jeworrek said.

More information here

2018 was fourth warmest on record

A report by the European Union’s Copernicus Climate Change Service showed last year was the fourth hottest since the organization began the study.

Average world surface air temperatures were 14.7°C last year, just 0.2°C off the highest record in 2016, scientists said in the first global assessment based on full-year data.

The report warned that the temperature of the last five years was 1.1°C higher than the average of the pre-industrial era.

Last year, Europe was especially warm and saw many countries in the Northern Hemisphere experience a rare, summer heatwave. However, Capurnicus said temperatures on the continent were less than 0.1°C below those of the two warmest years on record, 2014 and 2015.

Among other extremes in 2018, California and Greece suffered severe wildfires, Kerala in India had the worst flooding since the 1920s and heatwaves struck from Australia to North Africa.

Around Antarctica, the extent of sea ice is at a record low at the start of 2019, according to the U.S. National Snow and Ice Data Center.

The study also warned that CO2 emissions, one of the key greenhouse gases causing the greenhouse effect, have continued to rise.

You can read the full report here

Meeting the goals of the Paris Agreement could save about a million lives a year worldwide by 2050

Meeting the goals of the Paris Agreement could save about a million lives a year worldwide by 2050 through reductions in air pollution alone. The latest estimates from leading experts also indicate that the value of health gains from climate action would be approximately double the cost of mitigation policies at global level, and the benefit-to-cost ratio is even higher in countries such as China and India.

A WHO report launched at the United Nations Climate Change Conference (COP24) highlights why health considerations are critical to the advancement of climate action and outlines key recommendations for policy makers.

Exposure to air pollution causes 7 million deaths worldwide every year and costs an estimated US$ 5.11 trillion in welfare losses globally. In the 15 countries that emit the most greenhouse gas emissions, the health impacts of air pollution are estimated to cost more than 4% of their GDP. Actions to meet the Paris goals would cost around 1% of global GDP.

The same human activities that are destabilizing the Earth’s climate also contribute directly to poor health. The main driver of climate change is fossil fuel combustion which is also a major contributor to air pollution.

WHO’s COP-24 Special Report: health and climate change provides recommendations for governments on how to maximize the health benefits of tackling climate change and avoid the worst health impacts of this global challenge.

Some of these recommendations are:

-Identifying and promoting actions that both cut carbon emissions and reduce air pollution, and by including specific commitments to cut emissions of Short Climate Pollutants in their National Determined Contributions.

-Ensuring that the commitments to assess and safeguard health in the UNFCCC and Paris Agreement are reflected in the operational mechanisms at national and global levels.

-Removing barriers to investment in health adaptation to climate change, with a focus on climate resilient health systems, and climate smart healthcare facilities.

-Engagement with the health community, civil society and health professionals, to help them to mobilize collectively to promote climate action and health co-benefits.

-Promoting the role of cities and sub-national governments in climate action benefiting health, within the UNFCCC framework.

-Formal monitoring and reporting of the health progress resulting from climate actions to the global climate and health governance processes, and the United Nations Sustainable Development Goals.

-Inclusion of the health implications of mitigation and adaptation measures in economic and fiscal policy.

You can download the report here 


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.

COP24: Key Outcomes

COP24 annual UN climate conference concluded on Friday evening in Katowice, Poland, and we want to comment the outcomes.

The agreed ‘Katowice Climate Package’ is designed to operationalize the climate change regime contained in the Paris Agreement as it includes guidelines that will operationalize the framework by setting out how countries will provide information about their Nationally Determined Contributions (NDCs), which includes mitigation and adaptation measures as well as details of financial support for climate action in developing countries.

The main issues from COP24 still to be resolved concern the use of cooperative approaches, as well as the sustainable development mechanism, as contained in the Paris Agreement’s Article 6. The Article 6 would allow countries to meet a part of their domestic mitigation goals through the use of so-called “market mechanisms”.

In this aspect, specifically Article 6.4, intends to replace the Kyoto Protocol’s “Clean Development Mechanism” (CDM) for carbon offsets and the main discussion was centred on how or whether to carry forward the offsets, schemes and methodologies drawn up under the CDM – and whether to place limits on their use for meeting pledges under the Paris Agreement.

There were also arguments around how double counting relates to emissions cuts taking place in sectors not covered by a country’s climate pledge (“outside” the NDC, as opposed to “inside” it). These matters appear to have been unresolved as of the end of COP24 and governments look set to resume talks next year at the COP25 in Chile on a framework for international emissions trade under the Paris Agreement’s Article 6.

IETA Observations

Also we want to publish here IETA observations of the negotiations in Katowice. IETA explains in the report published on their website that more than two weeks of tough negotiations in the city of Katowice reached agreement on the bulk of a plan to implement the Paris Agreement. It is being hailed as a major landmark for transparency and reporting, but it failed to agree on the chapter governing Article 6 of the Paris Agreement. Despite several days of talks at ministerial level, the impasse could not be broken, and Article 6 decisions were set aside, to be revisited in 2019.

The only positive market provision in the Katowice Package is a basic reporting provision for market transfers, found in the Transparency rules for Article 13 (paragraph 77). Even this section relies on the more detailed guidance that is still incomplete.

According to IETA, The key outcomes from the two weeks include:

-The Paris Agreement Rule Book, which elaborates rules governing the reporting of emissions, regular stocktakes on progress in mitigation, adaptation, financial flows, addressing loss and damage, and a commitment to boost the ambition of Nationally Determined Contributions (NDCs).

-Formal acknowledgement of the Intergovernmental Panel on Climate Change (IPCC)’s Special Report on Pathways to 1.5°C.

-Conclusion of the Talanoa Dialogue, the year-long process of sharing stories and experiences that was designed to build trust and confidence in the multilateral approach and encourage ambition.

-A proposal by the UN Secretary General Antonio Guterres to convene a Climate Summit in September 2019.

-A mandate for the chair of the SBSTA to continue negotiations over the implementation of Article 6 of the Paris Agreement.

-Agreement to meet in Chile for COP25, although the date and specific venue are still uncertain.

You can download the full report here


EU ETS Market Report – November 2018

Carbon prices ended the month of November at €20.50, a gain of 25% from the closing price at the end of October. Screen trading volume in the front-year contract on ICE Futures totaled 432 million EUAs.

The market kicked off November by dropping to €15.10, its lowest level since July, as speculators continued to unwind length following the retreat from September’s ten-year highs.

But prices recovered very quickly to the €18.00-20.00 channel, and daily trading range steadily narrowed into a band between €19.20 and €20.50, representing the 38.2% and 61.8% Fibonacci retracement levels of the drop from September’s high to the November low.

Coincidentally at the centre of this band is the critical €20 level that is increasingly being viewed as the centre of gravity for the December futures market. Earlier in the year open interest in the December €20 call option was the highest of all strike prices, though open positions have tumbled as the contract expiry approaches.

Trading activity has become increasingly dominated by hedging activity around the outstanding €20 call options, and this was reflected in November’s increasingly narrow price band.

Energy fundamentals have also helped support carbon prices. German calendar 2019 baseload power gained 8.9% over the month, while calendar 2019 API2 coal declined 6% and TTF calendar 2019 gas edged up just over 1%. The result was a clear shift in favour of coal-fired generation and therefore demand for carbon.

By mid-month the calendar 2019 clean dark spread had risen to its highest levels so far this year as coal prices declined from the low $90s/mt into the mid-$80s/mt. At the same time, the clean speak spread continued its steady improvement, rising from around -€3.00/MWh at the start of November to around -€1.00/MWh by the end.

Traders believe EUA price  volatility will pick up again over the first two weeks of December, as options hedging shifts into high gear as the expiry of the contract takes place on 12 December.

Preceding the option expiry is the much-anticipated vote in the UK Parliament on the negotiated WIthdrawal Agreement. At present, the odds appear to favour a rejection of the deal, and therefore an increased risk of a “hard” Brexit on March 29 next year.

This implies that UK installations may begin to either sell surplus EUAs, or shift their portfolios to registry accounts in other EU member states in anticipation of that date, as UK access to the EU registry will likely be stopped at the end of March.

Numerous participants have suggested that a significant sell-off is unlikely since many of the largest installations are affiliated to EU entities and will threfore simp[ly transfer their allowances across the Channel. However, there remains a strong possibility that some selling will take place.

The final major market event of the year is the expiry of the December futures contract on 17 December. Open interest in the benchmark is currently 413 million EUAs, the lowest it has been on November 30 since 2012.

General expectations are for prices to begin to recover after the holiday season, with some forecasts calling for levels in excess of €32 during the first quarter of 2019. Much will depend on how soon German auctions resume and on the UK government’s response to the Brexit vote in Parliament.