>CARBON MARKET (EUROPEAN UTILITIES)

EC could delay 400m to 1.2bn of carbon auction in Phase 3 Reuters reported on 14th June that the European Commission’s draft proposals to stimulate the carbon market could involve delaying the sale of 400m, 900m or 1.2bn permits during 2013-15 and then releasing them over 2016-18. The EC declined to comment, citing market sensitivity. But market fundamentals do not change without a structural solution


The 1.2bn figure clearly cheered up a carbon market, which has been desperate for some good news, and carbon prices edged up over EUR8/t. However, we are of the view that simply delaying the auction of some permits in Phase 3 does not change the long-term fundamentals of the EU ETS. This appears to be more of a way to kick the can down the road and prevent the market from crashing.


Three basic options to deal with carbon, two unlikely, in our view
Out of the EU’s three basic options for dealing with the EU ETS – a temporary delay, a permanent set-aside or doing nothing – we think the last two are unlikely. Intervention in the European carbon market has become more a question of when and how, not if, but it is hard to imagine a permanent set-aside being implemented in the next 12-18 months due to the lack of political support from carbon-intensive countries, especially the Eastern Europeans and those countries that are struggling with recession. ST impact of the delay: from minimal to significant…


We estimate that ~1.8bn of surplus will be coming into Phase 3, and hence a mere 400m delay over three years will be unlikely to move the carbon market materially, if at all. Meanwhile, an action towards the upper range, e.g., 900m or 1.2bn, will likely create a temporary scarcity in the system, thereby boosting the carbon prices. Regarding a 1.2bn delay, we think the EUA price could be pushed upwards to EUR9-11/t by end-2013.


To read report in detail: CARBON MARKET