GLOBE SERIES

Volumes surge in European emissions market

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Source: GLOBE SERIES

Analysis by Bloomberg New Energy Finance shows that June saw the highest ever volume of carbon allowances (EUAs) traded in the European emissions market.

Volumes on the Intercontinental Exchange (ICE), which accounts for around 91% of the EU emissions market, reached 654MtCO2e for June and 78Mt on a single day on 23 June.

This beats the previous highs of 584Mt in March 2011 and 53Mt on 16 March this year.

These high volumes came about as the market reacted to a combination of influences, including concerns about an oversupply of emission allowances, falling oil prices, the European Commission's proposed energy efficiency package and the precarious state of Greece's economy. This caused to the price of the Dec-11 EUA contract to plummet 22% in five days from €15.65/t on 17 June to €12.26/t on 24 June.

Overall the second quarter of 2011 saw volumes of carbon emission rights traded throughout the world decline slightly, by 3%. The value of the market however increased to €26.4bn, up 6% from Q1 2011.

This rise in market value was driven by higher carbon prices in the European Union emission trading system (EU ETS) in April, May and early June compared to Q1. On average, Dec-11 EUA and CER prices increased by 8% and 7% respectively in the second quarter compared with Q1.

The firm prices were driven by Germany's decision to phase out nuclear power and the expectation that European power companies will need to start buying more allowances to compensate for the lack of nuclear power and the removal of free allocations in 2013 when Phase III of the scheme begins.

The main cause of the slight decline in traded volumes in Q2 was the dwindling interest in the market for primary Certified Emission Reduction (CER) credits issued under the Clean Development Mechanism of the Kyoto Protocol. With the lack of progress towards a new global climate agreement, transactions of CERs and Assigned Amount Units fell by 5% in Q2 compared with Q1.

Bloomberg New Energy Finance believes that overall the carbon market in 2011 will trade at record levels of around €106bn - an increase of 27% on 2010's revised figure (see note on methodology below). This will largely be driven by a boost in demand for allowances from utilities in the EU ETS.

Europe is set to continue to dominate the carbon markets for the rest of the decade at least, although Bloomberg New Energy Finance anticipates that it will be joined by Australia, California and New Zealand in the next five years.

If all these countries do implement cap and trade schemes, we forecast that the world's carbon markets could turn  over some €660bn by 2020 as prices and churn rates rise from their current levels.

Guy Turner, director of carbon and power market research at Bloomberg New Energy Finance, commented,  'Although prices fell dramatically in June, the high traded volume shows that the market is currently efficient and functioning well.

If prices rebound over the next few weeks trading activity should increase again on the upside of the curve, giving July a welcome boost in advance of the holidays.

'The risk is that excessive volatility, particularly on the downside, could drive traders out of the market. This in turn could reduce future liquidity and market efficiency. To prevent this, it is important that the European Commission maintains coordinated energy and climate policies.'

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