EU ETS Report – June 2018

Carbon prices rose for the 14th consecutive month in June even though the market endured some significant profit-taking after prices reached a new seven-year high.

The December 2018 EUA futures contract ended the month at €14.99, a gain of 0.5% from the end of May.

EUAs have trebled in value since the end of May 2017 as speculative traders entered the market and built significant long positions in anticipation of further gains after the Market Stability Reserve begins to remove surplus allowances from the market.

The impact of this buying has been exacerbated by industrial companies beginning to shift to a more proactive compliance strategy. Previously these businesses chose to cover their shortfall by buying during the first quarter of every year, but faced vastly increased costs in 2018 as prices more than doubled.

Most participants expect to see industrial companies managing their EUA price risk more proactively in future, and this may add to the buying interest going forward.

Prices continued their steep rise in the first week of the month and peaked at €16.70, after which traders began to take profit from long positions. EUAs plunged as much as 15% over the next fortnight to a low of €14.18 but stabilised towards the end of the month at around €15.00.

The decline in prices was slowed by numerous technical support levels, mostly in the region either side of €15.00, and in particular at €14.22. The strong demand that characterised the bull market of the first quarter had largely dissipated by the time prices reached €16.70. As prices moved above €16.00, traders reported greater caution being exercised in the market as participants waited for a sell-off to begin.

After peaking on June 5, EUAs punged €2.00 in ten days, and reached a low of €14.16 on June 20. Total screen-traded volume in the December 2018 contract on ICE Futures was 342 million tonnes, the second largest total since the market crash of January and February 2016.

Participants say the decline is a temporary phenomenon, as the market is entering the peak of the summer holiday season in July and August, when liquidity usually shrinks and demand from compliance compaies is at its lowest.

While July prices are broadly expected to stabilise at current levels, there remains a risk that the relative lack of participation may allow speculative traders to force prices up or down. However, the 50% reduction in auction supply in August is likely to stabilise the market, traders say.

And as the start of the Market Stability Reserve begins to loom larger on the horizon, sources suggest that demand may pick up as more speculators and coimpliance companies look to acquire EUAs at what may be relatively low prices.

New CDM issuance rules penalise developers and discriminate against smaller companies

The UNFCCC’s Clean Development Mechanism (CDM) has enjoyed great success in deploying more than $300 billion of investment into clean technology in developing countries around the world.

But recent decisions by the UNFCCC risk alienating many of the companies whose activities support this mechanism and discriminate against smaller enterprises.

Returns on CDM investments have fallen far short of expectations after prices for CERs collapsed and demand plunged. Project developers face shrinking returns but their costs remain high.

Unfortunately, the UNFCCC’s reaction to the drop in demand and prices for CERs has been to penalise project developers by requiring them to pay their Share of Proceeds before submitting their Request for Issuance rather than after the CERs have been generated and possibly, monetised.

This means that smaller developers have to divert precious cash flow to the UN before they have realised the assets. Bigger companies with greater financial resources naturally don’t find this a problem.

What’s more, the UNFCCC has introduced financial penalties for developers who withdraw requests for issuance or whose request is rejected. Developers stand to lose up to $30,000 for each issuance that is withdrawn after it has been published or that is rejected.

The CDM secretariat is already notorious for rejecting requests or issuance for the flimsiest reasons, ignoring the merits of the project and the accuracy of its verification.

Such financial penalties will act as a powerful deterrent to developers from requesting issuance, and could even kill off remaining interest in the CDM. Project developers take on enormous risk when setting up CDM projects in terms of time, money and resources, and to face a new, additional risk from the mechanism’s administrator is unacceptable.

Again, larger companies can devote greater resources to ensuring requests for issuance are compliant, so this decision also discriminates against small and medium sized enterprises which have fewer resources to devote to administration.

Project developers and investors must unite in their opposition to these new financial demands, which act as a deterrent to new investment and development and as a punitive tax on their activities, which benefit both the UNFCCC as well as the entire planet.

We hope that developers can agree a common approach and appoint a representative body to bring these concerns to the attention of the CDM authorities.

Alexis L. Leroy

CEO, ALLCOT Group

ICAO Council reaches landmark decision on aviation emissions offsetting

The ICAO Council made important headway on the key international standards supporting the UN aviation agency’s Carbon Offsetting and Reduction Scheme for International Aviation, or ‘CORSIA’.

Its adoption of the First Edition of Annex 16, Volume IV, to the Convention on International Civil Aviation (Chicago Convention), comes less than two years after ICAO’s 192 Member States achieved their historic agreement on CORSIA at the Organization’s 39th Assembly, an emissions-offsetting first for any global industry sector.

“Gaining agreement on this new Volume IV to Annex 16 is critical to helping States and airlines to operationalize CORSIA per its established deadlines,” stressed ICAO Council President Dr. Olumuyiwa Benard Aliu. “This especially pertains to its monitoring, reporting and verification (MRV) scheme, which describes in detail what has to be done, by whom, starting with the collection of information on international aviation CO2 emissions by airlines as of January 2019.”

Also approved at the Council’s meeting was the 2018 version of the ICAO CORSIA CO2 Estimation and Reporting Tool (CERT), which provides a simplified tool for small operators to monitor and report their CO2 emissions, and further agreement was achieved around the specifics for a CORSIA Central Registry (CCR).

Future Council work on CORSIA will focus on the timely realization of the remaining CORSIA Implementation Elements, including the evaluation of carbon market programmes against a set of robust criteria, the determination of its Eligible Emissions Units, and which aviation fuels will meet the CORSIA Sustainability Criteria.

The adoption of CORSIA SARPs complements other elements in the basket of measures including the enhancement of air navigation efficiency, the adopted aircraft CO2 certification standard and the long-term vision on the use of sustainable aviation fuels.

Developing countries face additional interest payments of up to $168 billion over the next ten years due to climate change

Developing countries face additional interest payments of up to $168 billion over the next ten years as a result of climate change, according to new research that has been prepared by Imperial College Business School and SOAS University of London.

The study is the first systematic effort to quantify the relationship between climate change, sovereign credit profiles, and the cost of capital in a sample of developing countries. It finds that, over the past decade, vulnerability to climate change has already raised the cost of debt by 117 basis points, translating to more than $40 billion in interest payments on government debt alone. Incorporating higher sovereign borrowing rates into the cost of private external debt, the figure reaches $62 billion across both the public and private sectors.

However, the researchers also found that investments in climate resilience can help improve fiscal health at the national level.

“Our work demonstrates that climate change is not only imposing economic and social costs on developing countries, but it is also amplifying existing risks that are already priced in fixed income markets. These impacts will grow. The good news is that investments in climate adaptation can not only reduce social, ecological and economic harm, but can buffer against fiscal impairments.  But to be effective, these investments need to be made now” Dr Charles Donovan, Director of the Centre for Climate Finance and Investment at Imperial College Business School, said.

Investments in effective climate mitigation and adaptation projects could include planting trees and building dikes for coastal protection in countries such as Bangladesh, Barbados, Cambodia, Fiji, Haiti, Honduras, Sri Lanka and Vietnam.

You can download the report here

Climate Financing by the world’s six largest multilateral development Banks Hit Record High of US$35.2 billion in 2017

Climate financing by the world’s six largest multilateral development banks (MDBs) rose to a seven-year high of $35.2 billion in 2017, up 28 percent on the previous year. In 2016 climate financing from the MDBs had totalled $27.4 billion.

The MDBs’ latest joint report on climate financing said $27.9 billion, or 79 percent of the 2017 total, was devoted to climate mitigation projects that aim to reduce harmful emissions and slow down global warming.

The remaining 21 percent, or $7.4 billion, of financing for emerging and developing nations, was invested in climate adaptation projects that help economies deal with the effects of climate change such as unusual levels of rain, worsening droughts and extreme weather events.

The latest MDB climate finance figures are detailed in the 2017 Joint Report on Multilateral Development Banks’ Climate Finance, combining data from the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the Inter-American Development Bank Group and the World Bank Group (World Bank, IFC and MIGA).

Latin America, Sub-Saharan Africa and East Asia and the Pacific were the three major developing regions receiving the funds. The report contains a breakdown of climate finance by country.

The sharp increase came in response to the ever more pressing challenge of climate change. Multilateral banks began publishing their climate investment in developing countries and emerging economies jointly in 2011, and in 2015 MDBs and the International Development Finance Club agreed to joint principles for tracking climate adaptation and mitigation finance.

Climate finance addresses the specific financial flows for climate change mitigation and adaptation activities. These activities contribute to making MDB finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development, in line with the Paris Agreement. The MDBs are currently working on the development of more specific approaches to reporting their activities and how they are aligned with the objectives of the Paris Agreement.

You can download the report here

Sport and Sustainability International webinars

Sport and Sustainability International (SandSI), a not-for-profit international organization based in Geneva that leverages the unequaled power of sport to encourage mind and behavior changes towards more responsible conducts, announced the launch of three free webinars.

The first one was about sustainable events certification-ISO 20121 from Euro 2016, Roland Garros and World Economic Forum and attendees could hear some success stories from the sports industry on improved social, economic and environmental business practices. If you could not attend the webinar, the record is available here

The moderator of this webinar was Russell Seymour, Chair-BASIS (British Association for Sustainable Sport) and the speakers, recognised experts in the field of sport and environment, were Neil Beecroft, ex-Sustainability Manager-UEFA, Viviane Fraisse, Head of Sustainable Development – Roland Garros, and Caroline Durand-Gasselin, Sustainability Specialist – World Economic Forum.

Beecroft spoke about the International Olympic Committee (IOC) sustainability strategy and explained that candidate cities should follow official criteria and recognized standards. He also emphasized that one of the most important standards is ISO 20121 and he explained how UEFA EURO 2016 earned this certification for operations at the tournament in France.

Fraisse explained that French Tennis Federation has put sustainability at the heart of its strategy and she told that they decided to measure and reduce their impact. Thanks to it, the French Tennis Federation got ISO 20121 in 2014 and they renewed it in 2017.

For its part, Durand-Gasselin told how the World Economic Forum Annual Meeting in Davos got ISO 20121 and recommended that people who organized events should use existing best practices to feed in a practical approach to sustainability to create a system for action, that is to say, structuring the approach to sustainability.

The next two webinars of this series will be on Carbon offset and UN SDGs applicable to sport events.

If you want some information, you can write at info@sandsi.org

Green economy offers more significant and safe investment opportunities than fossil fuel sector

Green economy, an economy that aims at reducing environmental risks and ecological scarcities,  offers more significant and safe investment opportunities than fossil fuel sector, according to a report carried out by FTSE Russell, a leading global provider of benchmarks, analytics, and data solutions with multi-asset capabilities.

The report, called Investing in the global green economy: busting common myths presents six key features of the green economy.

First of all, the green economy represents 6% of the market capitalization of global listed companies, approximately US$4 trillion. This represents a significant investment opportunity, approximately the same size as the fossil fuel sector.

Secondly, the green economy proportion of the global market capitalization is growing, while the fossil fuel sector shrinks.

In third place, the green economy is diversified by company size. While small and mid-cap companies have a greater green exposure and represent a larger number of green companies the market is by no means small and mid-cap dominated; large-cap companies represent approximately two-thirds of green market capitalization.

In fourth place, the green economy is diversified across ICB Sectors. Industrials are the largest element, followed by Utilities, Technology, Chemicals, and Construction and Materials. This highlights the diverse nature of goods and services addressing environmental challenges.

In fifth place, the Green economy is global. The US is the largest element of the green economy; however, Japan and Europe have the highest green exposure. While China is the third largest element of the green economy; its green exposure is underweight but growing rapidly.

By last, it’s outperforming. Green companies have shown outperformance with FTSE Russell’s broadest green indexes outperforming their parent benchmarks over the last five years.

You can download the report here

EU ETS Market Report – May 2018

EU carbon allowances ended the month on a downbeat note, with the December 2018 contract closing at €14.91, down nearly 6% on the day.

Overall, however, prices advanced by 9.7% over the course of the month, representing the thirteenth consecutive monthly gain for carbon.

Trading activity was high, with more than 350 million front-year EUAs changing hands on ICE Futures in May, the most since February 2016. Liquidity was boosted by significant price fluctuations, with 60-day historical volatility climbing into the low 40s%, the highest this year.

The boom in sentiment triggered by the approval of Phase 3 reforms continues to drive the market, though the correction seen at the end of the month had been largely expected by traders for some time.

Analysts had predicted prices of around €15/mt by the end of the year, and confessed surprise at the speed of the increase. This only added to the growing sentiment that the market was due to a reversal.

Reports emerged in May that utilities have been reducing their forward power sales, yet have continued to buy carbon permits against future price rises. While this explains the 13-month rally for carbon, it also calls into question future price rises. If utilities have already covered their demand out to 2021 or even later, where will compliance demand come from to support the market going forward?

The mood going into June is cautious. The nearly 6% drop on May 31 erased two weeks of gains, which sources attributed to end-of-month profit-taking. The outlook is not helped by a one-third increase in the volume of EUAs to be auctioned this month, and with the summer holiday season approaching, much will depend on the weather as well as on speculative demand.

Technical signals are pointing to a short and sharp price correction. The relative strength index plunged from 75% on May 29 to 50% on May 31, suggesting the market is ready to move into oversold territory within a matter of days.

At the same time, the moving average contraction and divergence (MACD) indicator also reversed very quickly, with the signal line dropping below the underlying average on May 31. Momentum is clearly negative, but where prices bottom out remains an open question.

Sources point to a variety of support levels, ranging from €14.85/mt (which was tested on May 31) to major levels at €13.65 and €12.50/mt.

 

 

World Bank Report: Governments continue to prepare for, and implement, carbon pricing initiatives

State and Trends of Carbon Pricing 2018

World Bank has launched the annual State and Trends of Carbon Pricing 2018 report, which shows that carbon pricing continues to gain traction.

Governments at national and subnational levels around the world continue to prepare for, and implement, carbon pricing initiatives as a means to curb their emissions while raising revenues. 70 jurisdictions (45 national and 25 sub-national) have implemented, or are scheduled to implement carbon pricing initiatives. These mechanisms helped governments raise about $33 billion in 2017 in carbon pricing revenues from allowance auctions, direct payments to meet compliance obligations, and carbon tax receipts. This represents a 50% increase compared to the US$22 billion raised in 2016.

Implementation of carbon pricing initiatives has tripled in the past decade. In 2016 and 2017, this increase was primarily driven by jurisdictions in the Americas, including Chile, Colombia, the Canadian provinces of Alberta and Ontario, and the U.S. states of California, Massachusetts, and Washington. But other regions are also active. In December 2017, China announced its plan to operationalize its national emissions trading system (ETS) in phases, starting with the power sector.

With a fully operational Chinese ETS, carbon pricing mechanisms around the world are projected to cover 11 gigatons of carbon dioxide equivalent (GtCO2e), or about 20 percent of global greenhouse gas emissions, up from 15 percent last year. The report also finds that carbon prices are rising, with about half of emissions now covered by carbon pricing initiatives priced at over US$10/tCO2e, compared to one-quarter of emissions covered in 2017.

“Governments at all levels are starting to see the effectiveness of carbon pricing in their efforts to cut harmful carbon pollution while also raising revenues for climate and other policies, including environmental action,” said John Roome, World Bank Senior Director for Climate Change.

You can download the full report here

EU ETS Monthly Report – April 2018

European carbon completed twelve consecutive months of price increases in April, setting a new record for sustained gains, as the annual compliance cycle combined with continued speculative interest to boost the market.

December 2018 EUAs ended the month up by 2.3% from March 29 at €13.60/mt on ICE Futures; one year ago the contract closed at €4.57/mt!

April started with the publication of EU ETS verified data for 2017: CO2 emissions last year rose by around 0.3%, the first increase since 2010. An increase had been widely forecast, due mainly to increased coal generation as nuclear plants suffered reliability problems and hydro generation was very low in many parts of Europe.

The market managed to fend off repeated bouts of profit-taking and some attempts to squeeze long positions out of the market, and during the month EUAs set a new 6.5-year record price of €14.22/mt.

Trading volume in the front-December contract was down around 12% from March, as the rapid price rise (31%) of last month gave way to a relative consolidation in April.

Carbon has risen exactly two-thirds since the start of 2018, and if analyst forecasts are to be believed, we may see prices heading towards €15/mt later this year. With the Market Stability Reserve’s launch growing ever closer, more and more industrials are believed to be building reserves of EUAs while they remain relatively cheap.

The month’s price action was dominated by speculative traders and by the annual compliance cycle. Industrial installations and power stations had until April 30 to deposit with the European Commission EUAs matching their verified emissions for 2017.

According to market sources, many industrials had put off buying their remaining EUAs in the hope of achieving lower prices. There were numerous reports of last-minute buying in the final week which no doubt helped to boost prices.

While compliance was reaching its climax, the speculative element continued to support the market, betting on higher prices in the coming months. Open interest in call options for December 2018 EUAs has risen to 207 million tonnes, while put options show a total of 139 million tonnes of OI.

The majority of open interest in the call options rests between strike prices of €13-20, suggesting that if prices rise further, sellers of these options will need to buy additional EUAs to cover their exposure.

The question in the market is what will happen to prices now that compliance is over. Fundamentals do not support carbon at such high levels, many traders say. With the clean dark spread in negative territory for a significant number of coal-fired generators, the incentive to sell forward power and the hedge is limited.

Even margins for lignite-fired plants – typically among the cheapest but dirtiest to operate – are shrinking, analysts say.

There’s considerable speculation over just how much forward power utilities are selling at these profit margins. If power generators aren’t selling electricity and buying carbon, then who will keep the EUA price up above €13.00?

Trading in May will, therefore, be closely watched for any signs that speculative interest is diminishing. Analysts in mid-April raised their price forecasts for 2018 by around 30%, but it remains to be seen whether carbon can average around €12.00-13.00 for the whole year.