London, 10 January 2012

EUA prices in 2012 now forecast to average 7.5 €/t and CERs to average 4 €/t: In a moment of Christmas benevolence, Barclays Capital welcomed the news that the Environmental Committee of the EU Parliament passed a number of resolutions that would facilitate the EC holding back a significant volume of phase 3 EUAs from the first few years of the phase. After some deeper reflection, they are now more circumspect on this as the entire concept of the set-aside raises uncomfortable issues about political interference in the EU ETS.

"Important in this is a realisation that much of the over-supply in the market of allowances comes initially from two separate incidental rules that were introduced for political, rather than market reasons. The first was the linking Directive, which was initially passed to provide the sort of price (and cost) containment that we are witnessing at the moment – with over 400 Mt of CERs/ERUs being issued in 2011 alone.

"The second was the NER300, a politically motivated subsidy mechanism that brought forward 300 Mt of phase 3 EUAs from being gradually released into the market over the 2013-20 period as new entrants appear, and concentrating most of the selling in 2012. The impact of the NER300 on the market has been dramatic as the promise of regular sales by the European Investment Bank (EIB) was certainly a green light to most traders to short the market," says Trevor Sikorski, Director, Environmental Market Research.

It was certainly an easy bet, particularly in such a weak market and the falls from 10 €/t to 7 €/t coincided with the announcement on the transfer of EUAs form the EC to the EIB and the expectation that selling had begun.

So, two elements of interference in the basic workings of the market has led to further political pressure to interfere in the price mechanism as prices are now seen too low to stimulate investment

"The great irony is that one of the key reasons prices are so low is a political will to encourage investment in high-cost emissions-reduction technology. But the low prices now mean the subsidy levels (revenue earned from NER 300 sales) will be too low and carbon prices insufficient to get more than one or two of the pilot CCS projects actually built," says Sikorski. Now the set-aside concept looks likely to survive but will only likely be fully defined in the second half of this year –and then will only influence supply from 2013.

"Yes, prices are likely to reflect whatever value of set-aside is finally agreed at the EC/EU Parliament level, but such an impact is most likely from H2 12. With macroeconomic risks to prices still on the down-side and Q1 likely to be weak, our carbon price outlook has been written down, with EUA prices in 2012 now forecast to average 7.5 €/t and CERs to average 4 €/t."

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