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CO2 Emissions Allowances, Get Ready For A Tumble In Hot Air Credits

Commodities / Climate Change Dec 28, 2011 - 12:21 PM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleEurope's mandatory CO2 emissions allowances (called EUAs), and their alphabet soup of derived and related "financial instruments" have traced a boom and bust in notional or paper "value" similar to the paper shuffled by the USA's voluntary scheme for "monetizing" carbon. In both cases the supposed goal was generating the financial support needed for Energy Transition away from fossil energy to low carbon green energy. At a moment when the European Commission and the EU's investmenk bank the EIB are possibly taking actions which can implode the European carbon finance system, one of the many ironies is that 2011 in Europe was one of the warmest, or least cold years ever recorded. Despite this, restoring credibility and more important, the cash flows needed to keep high-living carbon traders at their playstations rolling the dice, is unlikely.


US carbon trading provides a sombre backdrop to what can happen in Europe. The US emissions market CCX was at one time, at the start of the century apparently set for big success. Not only was a young Barack Obama a board member of the Joyce Foundation which seed funded the fledgling CCX, but over a few short years it attracted all the right, big name climate investors such as Goldman Sachs, Climate Change Capital and Al Gore’s Generation Investment Management.

Then funny things happened on the path to the CCX growing like the expanding Universe in the few nanoseconds near its start: forecasts that its turnover would first hit $500 billion a year, then $10 trillion a year were dashed. The highly anticipated looting of taxpayers and consumers — to save the planet -- imploded following its high water mark in the US with the passage of the Waxman-Markey bill (the American Clean Energy and Security Act of 2009), modelled on Europe's enabling regulations, then laws starting with the 2005 start of the mandatory European Emissions Trading Scheme or ETS.

With ongoing economic recession, Climategate, Arab Spring, Europe's debt crisis, Occupy Wall Street, the Tea Party movement and even falling oil prices, what once seemed like a sure thing became anything but. In the last days of the US CCX, end 2010, voluntary market credits fetched 5 US cents for the right to emit 1 ton of CO2.

SELL OUT WHILE YOU CAN
Europe's surviving scheme, the world's last or only, is now a target for increasing "benign neglect". Its lifeline investor support is waning, shown by the falling value of EUAs: in the high times of 2009 these could fetch more than 20 euro or $30 per ton of CO2, but now hover around 8 euro with occasional shifts below 6 euro, but as yet the yawning pit of CCX prices in its Last Days has not opened.

The great thing about carbon credits is they can be printed, like any fiat money or stock certificate for a "cant fail" business or company: in 2009, European ETS credits of all kinds rode on about 2 billion tons of CO2, which at around 20 euro-a-ton generated some nice turnover if nothing like the "$500 billion a year" hopes of emissions boomers like Al Gore. However, just like any paper promise thrown on the pinwheels of the global fiancial casino, the timing has to be right, and in particular you have to know when the market is going to crash - and sell out fast.

This week's news is the European Investment Bank may have started selling 2013 carbon allowances in a 1.8 billion-euro ($2.4-billion) program, but will ensure this news is denied as long as possible to prevent EUA prices crashing too fast, as we would expect from an institution dealing in long-term investment under all the nicest regulations applying to clean fingernailed institutions, who write their own regulations. The comparison with the oil market - always the Big Brother role model for carbon boomers - is shown by market comments from analysts, saying that when governments release oil stocks "to lend volume to the market" they generally start leaking the news a month or so ahead, to see how the market reacts to the news. More important, even in emergency situations where a possible market crash could result (and for oil, where price gains will go on happening despite the released stocks), governments and their agencies will forewarn the market.

Europe's EIB receives carbon permits directly from the European Commission, the regulator of the world’s largest emissions market, at the beginning of December and has to sell them within 10 months. Running a check on carbon market price trends, today, in the market context of today shows this latest wad of paper could do serious, even terminal damage to Europe's ETS. Generally and previously, annual inputs of new EUAs and other carbon paper, like sCERs and CDMs could cause a slump in value for a period of around 12 - 30 days after each dumping. This year's possibly panic-driven sale may be very different: carbon prices could go down and stay down. Their only hope, by another real twist of irony, is that oil prices soar, the market operators' and traders' folksy rationale being that "if oil is on the rise it becomes more valuable to try saving it with green energy", but in reality that European governments will go on funding Low Carbon because of its oil-saving image.

STEALTH SELLING
The EIB may in fact have already begun privately selling a first tranche of 200 million EU permits from the post-2012 third phase of the EU’s emissions trading system - programmed for 2013 - supposedly to fund a certain number of renewable energy and carbon capture (CCS) projects in 2012: the downsized scope of these projects is shown by the hoped-for product of the sale, about 1.8 billion euro, or just about enough for one 300 MW offshore windfarm. As far as CCS is concerned, the price tags for this vanity tech are much higher, but the real goal of this possibly illegal early sale of 2013 credits could be something a long way from the Save the Planet mantra, and concern European sovereign debt bailouts and financial operations. Here again, 1.8 billion euro is very modest, but with leverage big things can be hoped for, inch'allah.

Trading companies buying 2013 European Union carbon permits directly from the EIB are already accused of possibly having “privileged information”, which is coded language for suspecting the permits have already been handed out, and will go on being handed out to EIB-friendly players, then dumped in an EIB-planned hit and run move. To be sure, the EIB claims that over-the-counter transactions “will be structured to ensure best competition", but the bomb is coming. In a completely different market from oil, where releases of symbolic quantities of government-controlled stocks are supposed to stabilize and then reduce daily prices, but do not, the EIB carbon finance play starting in January - but in theory able to be stretched to early October - may have big and possibly permanent downward price impacts, despite the exact opposite being hoped for.

Giving us an idea on when the EIB will sell these permits, which could extend to 300 million tons of CO2 credits "before October 2012", according to information available on European Commission web sites, the EIB says it will disclose nothing about these sales until "about January 11th" in its first monthly report on sales of carbon allowances from the new reserve it has received from the European Commission.

We can summarize that the outlook for Hot Air permits isn't bright, except for short selling strategies. EU carbon for 2013 had already dropped to a record low of 7.26 euros a metric ton on December 14 on the ICE Futures Europe exchange in London. The front-year contract is trading at about 8.70 euros this week. The EIB's move logically promises more downward movement in paper carbon, possibly a rout - unless oil prices rise.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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