Carbon Market Analysis: carbon resists rating downgrades

Marius Frunza's sEUA and sCER forecast

Recent downgrades to European economies came when markets seemed to find support with a positive outlook. Nevertheless, markets were not responsive to the announcement since this news has been expected for some time, and already de facto priced since the autumn of 2011. The equity market started the week on a positive trend, keeping the previous week’s upward line. Carbon prices started in negative territory, but the variation is mainly due to the fears of an over-supplied market. Despite an uptrend of the energy complex, the carbon prices are clustered around the €6.50 level.

Given the current state of the supply-demand equilibrium, there is no reason to think that the prices might enter into positive territory before Q2. The only support could come from an UE decision con- sisting of a more aggressive phase III target.

Marius Frunza is eCO2market’s Head of Research. This article originally appeared in the 25 January 2012 edition of eCO2abacus. Click here to receive eCO2abacus in your email or view previous editions.

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Law giant DFDL Mekong chooses eCO2data to grow business

eCO2market is pleased to announce that Thailand’s law giant DFDL Mekong has selected our company’s flagship service, eCO2data, to help expand business opportunities for their law and tax offices.

By selecting eCO2data, DFDL Mekong has chosen the most expansive carbon projects and participants database to help grow their law advising business.

eCO2data offers such robust tools that businesses not traditionally associated with carbon can find incredible value in our system. eCO2data offers more than 10,000 participating entities involved in all aspects of carbon project ownership, development and credit trading. Moreover, the system has catalogued more than 20,000 different projects around the world in four different standards to provide an unparalleled and intuitive user experience that expedites all carbon information dissemination.

Please join us at eCO2market in saying, “Welcome,” to DFDL Mekong!

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eCO2market welcomes ToughStuff as newest client

eCO2market is pleased to welcome ToughStuff as our newest client. ToughStuff is another example that demonstrates eCO2data’s powerful abilities and focuses the platform as an innovative tool no matter who your company approaches sustainability.

ToughStuff has made a name for itself by producing low cost and reliable solar solutions for under served communities. Coupled with eCO2data’s immense project and participant datable, ToughStuff is able to leverage better information to find new communities and projects where their modular solar solutions will be the most beneficial.

Only eCO2data has the robust and independent information that clients like ToughStuff need to build their businesses, find new customers, encourage sustainable living and ultimately help reduce climate change’s overall impact through a variety of disparate solutions.

For more information about eCO2data, visit http://www.eco2data.com/signup to register a free account and test the service yourself today!

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Carbon Analysis: Market moves challenge pricing decisions

Quite unexpectedly, the iron rules that used to drive the pricing of primary CERs (pCERs) not so long ago seem to be cracking one after the other, much to the dismay of credit buyers.
For the record, the primary price is not quoted on a market, but the price is based on the range of bids and offers reported from the primary market. This pricing is usually driven by certain rules, case in point, pCERs’ price is driven by secondary CERs’ (sCERs) market price evolution with the delivery risk explaining the discount. This delivery risk can vary from one project to another, but most of the time it is correlated with the host country or project’s technology. This risk delivery is explained by the failure of a project to get financed, registered, or by uncertainties regarding project performance (see chart).

Project risk by technology - Original graphic by analyst Alexis Poullain

Recently, the “classic” pricing structure has been challenged. Usually, the price of pCER evolves in a channel defined by an upper limit (the ceiling price) and a lower limit, that most analysts used to bind to a theoretical bottom price of a project’s cost level of an average 8 EUR/t (a red line crossed for several months now, due to secondary market’s crash).
The diving prices also triggered other uncommon moves, such as seeing credit buyers looking for slower project registration or credit issuance events. Indeed, CER buyers are prompted to renegotiate or cancel their purchasing agreement given the current price level, this can be up to 10 EUR below their current emission reduction purchase agreement (ERPA). This whole situation is explained by a lack of future visibility. And the only way back to equilibrium shall be brought by a clarification of the rules of the playground for the coming period.

Alexis Poullain is a carbon market analyst at eCO2market. This article originally appeared in the 11 January, 2012 edition of eCO2abacus, our free weekly carbon market newsletter. Sign up to receive it by email each week or view old editions.

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American airlines already benefitting from new EU rules

Image via treehugger.com

Yesterday, Reuters published an interesting piece about how American airline companies are already seeing windfall profits from new EU ETS rules geared towards reducing airline carbon emissions. After several months of bickering, and the American government  drafting a bill making it illegal for American airlines to participate in the EU ETS, airline companies must be quietly pleased that they could see additional revenue instead of the heavy costs they prognosticated. It would seem that compliance in early 2012 is not as troubling as airlines would lead one to believe.

According to the article, airlines that have already instituted $3 ticket fees (5 airlines) will reap windfall profits, “because airlines will be awarded two-thirds of their permits for free and the price they need to pay for the remaining emission certificates is languishing near record lows.” This concise and precise diagnosis is backed up by a 31 December dated report that finds, “[airlines] will pocket as much as $2.6 billion over the next eight years because most permits will be given away for free”. It would seem that American airline companies will stay the course of objection, even as carbon prices hover near record lows. If 2012 goes as expected (Point Carbon subscription required), these companies could very well benefit over the long term.

The final point, and one that is near and dear to eCO2market, has to do with pricing transparency. The Reuters article acutely wonders how airlines will transparently show customers where their additional fees are going.

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Carbon Market Analysis: Can the EU ETS be fixed?

2011 was characterized by global torment in global capital markets mainly during the second semester. The main causes were the debt crisis and the increasing fear of the Euro zone being dismantled. These facts put a very pessimistic perspective on global growth, thereby pushing the main markets into negative territory. Nevertheless, both carbon underlyings EUA and CER plunged deeper than other commodities or equities. Meanwhile, crude oil remained in a stable range over the past 12 months. The overreaction of the carbon prices was also augmented by the regulatory framework’s lack of stability and by the uncertainty of the market after 2012. The negative returns/high volatility couple was also supported by the fundamental decline of carbon prices and by the increased technical trading compared to the physical demand. The historically low prices only 12 months before the beginning of the more penalizing phase III showed, in fact, the weakness of the ETS designs. A price decreasing exponentially, even if theoretically the phase III has a higher deficit, underlines the fact that the cap and trade framework is not stable and needs to be revisited. In fact under the fixed allocation established in 2005 the decreasing price is completely inappropriate for the actual conditions (continued after graph).

EUA/CER vs. commodities, clean dark German spread (right axis)

What is a cap-and-trade framework if not an option on the abatement of carbon? Obviously the allocation of the cap-and-trade system determines the value of this option and should be revisited dynamically depending on some macro-economic factors. Thus, as long as the allocations are fixed, then the installation will always have an option to create a surplus, thereby putting pressure on the ETS prices. A dynamic allocation reviewed periodically would be in the actual state the best solution in order to give EUAs momentum.

Spot EUA and CER price forecasts

 

 

 

 

 

– Dr. Marius-Cristian Frunza is eCO2market’s Head of Research. This article originally appeared in the 3 January, 2012 edition of eCO2abacus, our free weekly carbon market newsletter. Sign up to receive it by email each week or view old editions here.

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Carbon Market Retrospective 2011: a record year, for better or worse

Last year was full of surprises, good and bad included. Of course, for worse, CER prices lost two-thirds of their value within the year, from almost 14 €/t in June to less than 4.5 €/t at the end of 2011. On the other hand, the CDM pipeline operated at full capacity in 2011. While 130 million CERs were issued on average for the last 3 years, 319 million emission reduction credits were dished out last year alone representing an all time high.

This issuance spike is explained by two main reasons: firstly, by the registration and the UNFCCC optimizing the issuance process, but most of all by the project developers’ rush to registration (see chart) due to the post 2012 uncertainties.

Registered CDM projects by year

Indeed, despite record long negotiations in Durban, the fate of the Kyoto Protocol is still undermined by the major issue of visibility. Albeit the CDM is reaffirmed as the main market tool to reduce emissions globally, the question of the lack of a concrete pledge, and hence concrete level of demand for credits, is still open.

– Alexis Poullain is an analyst for eCO2market. This article originally appeared in the January 3rd, 2012 edition of eCO2abacus, our free carbon market newsletter. Click here to view old editions or sign up to receive new editions via email.

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