CER Market Wrap

The Certified Emission Reduction (CER) price headed below €13 this week, settling at €12.20, marking a six-week low that came on the back of the low trading volumes often experienced in the northern hemisphere holiday period (July/August).

The CER price action followed the EU Allowance (EUA) sell-off ahead of the UK Auctions (4.4 million permits auctioned on Thursday), weaker power fundamentals (lower gas prices in the two largest markets of the UK and Germany), technical selling levels and a difficult week for global markets. Friday was the only up day in a bad week for carbon and this was on the back of the EU announcing a tighter cap for 2013, with a reduction in EUA's of 2.4 per cent – the final number is yet to be finalised.

The CER market will continue to watch the EUA's for direction. The main drivers here will be any improvement in the EU economy that drives industrial output and power use.

In the next week, the EU market will be hoping for a decision from the EU on the timing of the auctioning of allowances for post-2012. This has a large impact on supply over the next two years and the market is eager to understand their shortfall/surplus over this period.

A key dynamic to understanding the CER market is that the price follows the only liquid, listed carbon price: the EU Emission Trading Scheme (EU ETS) EUA's. The EU ETS is oversupplied for the commitment period 2008-12 so the expected shortage in the 2013-20 market plus the auction timing is a key driver/price support for the EUA price.

On the CER supply side, the issuance from the UNFCCC Executive Board has almost come to a halt as the backlog of requests builds, with around 70 million CERs sitting in the issuance process (total CERs issued to date is 420 million). Also from the EB, the decision to restrict the supply from the contentious HFC CERs, representing 50 per cent of CERs issued to date, has been delayed.

To end on a carbon market positive note, Barclay's takeover bid for Tricorona (a carbon broker and developer with a portfolio of over 100 million CERs pre and post 2012) reached 81 per cent acceptance, demonstrating that despite the global uncertainty post Kyoto, Barcap believes the carbon markets are here to stay.

Source: ECX, 12 July 2010

Emma Jenkin is a commodity markets specialist with a focus on carbon financing for Cool nrg, a distributor of mass energy efficiency globally using carbon credits.