Commodities Now – London, 25 June 2011

Yesterday's 10% drop in EUA prices reflects both specific concerns about the EU-ETS itself and a more general concerns about the ability of the EU authorities to prevent an accelerating crisis of confidence in the integrity of the Eurozone from degenerating into a second EU recession in three years, according to Deutsche Bank in  Special Commodities Report.

"We think that what both the specific and general concerns underlying the sharp fall in EUA prices have in common is that they point to a spiralling crisis of confidence in the will and the wherewithal of the EU authorities to achieve their stated policy aims," say Deutsche.

"In other words, we think that the sharp fall in EUA prices yesterday is down to fear: fear that the Eurozone and broader EU economy might now be on the verge of another severe slowdown, and fear that under such a scenario the Commission would not be able to take the necessary measures to re-establish price tension in the EU-ETS."

Against this backdrop, Deutsche conclude that in the short term there is little or no incentive for buyers to step in, and that there is therefore now a clear risk of prices falling further still over the coming days and weeks ... "until there is visibility on the end-game for the Greek financing crisis."

On the ETS-specific issues causing concern at the moment, the one that most worries Deutsche is the escalating political confrontation between the EU on the one hand, and the US, China and other governments on the other, over whether non-EU carriers should be included in the EU-ETS from 2012.

"On macro fundamentals it now comes down to a binary outcome: either the EU gets through the current Greek crisis without triggering a broader economic crisis in the Eurozone; or, the current crisis in Greece ends up tipping the Eurozone and EU economies into a second recession in three years, and we are then forced into downgrading our ETS emissions forecasts and EUA price targets more materially than we did earlier this week, and potentially much more so," say Deutsche.

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