FOCUS ON Carbon Markets: June-July 2017

The EU benchmark contract opened the month of June in a downward trend, mainly giving back the small gains brought by the last week of May along with reduced auction supply in the market.

Outlining an overall U-shape trend, the European carbon price saw little volatility during the June-July period, which kept Dec-2017 Friday’s closures between €4.87 and €5.42. In particular, around mid-June the EU carbon allowances fell below the €5.00 mark as EU representatives prepared to resume talks on post-2020 ETS reforms. However, at the beginning of July, the Dec-2017 contract managed to jump again above €5.00, bolstered by gains in power and coal prices as well solid auction results that helped to maintain a €5.30-60 trading range until the end of the month (ICIS Tschach Solutions, 2017; Market data).

As for the EU’s regulatory activities, both June and July sessions on the Union’s ETS reform closed without a final deal, with the EU trialogue negotiations planned to resume in September. Major issues on the future of the ETS after 2020 remain unsolved, including the ambition level and the carbon leakage.

As a key issue for the future success of the EU climate policy, the ETS reform is gathering a lot of attention. By providing an assessment of the problems currently affecting the EU ETS, the Brussels-based NGO Carbon Market Watch recently released a report proposing some potential solutions. Calling for “removing favouritism and discrimination from the EU’s carbon market”, they propose a number of adjustments, such as: “increasing the Linear Reduction Factor (LRF) from 2.2% to 4.2% from 2021 onwards” in order to bring the EU’s flagship climate instrument in line with the Paris goals; “divide the costs of the low-carbon transition more equally between citizens and industry, by limiting the amount of free allowances to industry”; “up-skill workers for the low-carbon transition through a new Just Transition Fund to be financed from auctioning revenues”; “remove discrimination between the industry and power sectors by eliminating unjust overcompensation to the steel sector”; “tailor carbon leakage approaches according to evidence of observed risks in industrial sectors”; and “auction all allowances in the future and thereby increase the revenues for low-carbon innovations”.

Front-year EUA and CER prices, 2017. Weekly closure (Source: ICIS Tschach Solutions, 2017; Market data)

 

However, some progress was achieved on other aspects. On June 14, the EU Parliament adopted its position on the so called Effort Sharing Decision (ESD) on the non-ETS sectors. As proposed in July last year by the European Commission, a total of 100 million allowances can be used by some Member States to comply with non-ETS obligations. Without relevant changes, the Parliament showed its support for the proposal that will now go under the inter-institutional negotiations with the European Council. By allowing the transfer of allowances from the ETS to the non ETS sectors, the proposal would indirectly reduce the ETS cap by up to 100m allowances (ICIS Tschach Solutions, 2017; EU ETS Monthly Market Briefing – July 2017). Some days later, the EU energy ministers reached an agreement on the energy efficiency target, which they propose should be set at 30% by 2030 in line with the Commission’s proposal, even though it should remain non-binding.

Finally in July, the European Parliament’s environment committee (ENVI) voted to extend the suspension of the extra-EU flights from the ETS up to 2020, Euractiv reports. However, the committee called for a 2019 review of the new global Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), agreed in 2016 under the ICAO, according to whose progress some of the OECD country’s routes can be again regulated under the bloc’s carbon market. Parliament is expected to adopt its final position on the draft law in its September plenary session in Strasbourg. The Parliament then has to reach a final compromise with EU Member States by the end of April 2018.
Little movements characterized the market for UN-backed carbon credits, where the price of CER 2017 went from €0.22 to €0.21 over the two-month period (ICIS Tschach Solutions, 2017; Market data).

 

This article was first published on ICCG’s International Climate Policy Magazine n. 47.

(Image: Sao Paulo Stock Exchange. Photo credit: Rafael Matsunaga)