EUAs and CERs : moving in lockstep ?

30 6 10 14 18 22 26 € /ton of CO 2 Aug 09 Sep 09 Sep 08 Oct 09 Jul 09 Jun 09 May 09 Apr 09 Mar 09 Feb 09 Jan 09 Dec 08 Nov 08 Oct 08

CER Price Dec 09 11.96 €

Futures Price Dec 08 - ECX CER Price Dec 08 - Reuters EUA Price Dec 09 13.36 €

Carbon prices:

Drifted lower in anticipation of sagging demand and excess supply.

Source: ECX, Reuters

Please note: Dec 09 contracts were used as of 16/12/2008.

Please note: Dec 09 contracts were used as of 16/12/2008.

5€ 1€ 4€ 3€ 2€ 0€

EUA-CER (Dec-09) Price Spread

Aug 09 Jul 09 Jun 09 May 09 Apr 09 Mar 09 Feb 09 Jan 09 Dec 08 Nov 08 Oct 08 Sep 08 Sep 09

EUA – CER price spreads:

Narrowed in anticipation of limited CER supply.

Source: ECX, Reuters 0 200 160 120 80 40 280 240 360 400 480 520 440 320 Sep

08 Oct08 Nov08 Dec08 Jan09 Feb09 Mar09 Apr09 May09 Jun09 Jul09 Aug 09 Sep09 Monthly volume traded on the European CO2 market

(OTC & Carbon Exchanges)

Mt CO

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Monthly volumes:

56% increase from August, 368 Mt traded split evenly between OTC and exchanges.

Source: PointCarbon

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Tendances

_{T h e M o n t h l y B u l l e t i n o n t h e E u r o p e a n C a r b o n M a r k e t}

Carbone

N°40 • October 2009 •A newsletter of the Mission Climat, Department CDC Climat of Caisse des Dépôts – in partnership with

Graph of the month:

The CER term structure

The term structure shows a change of the relative prices of CERs maturing between 2009 and 2012. Since May 2009, the price of CER’09 rose above that of the CER’12, ’10, ’11 (Backwardation) reversing a trend that has been in place until that time (Contango). The anticipation of potential problems in the utilisation of CERs in Europe and the uncertainty related to the future supply of CERs may explain this new term structure of CER prices.

Source: ECX 1.0€ 0.8€ 0.6€ 0.4€ 0.2€ 0.0€ -0.2€ -0.4€ -0.6€ -0.8€ Dec. 08 Jan. 09

Price spread 2011-2009 Price spread 2010-2009 Price spread 2012-2009

Feb. 09 Mar. 09 Apr. 09 May 09 Jun 09 Jul. 09 Aug 09 Sep. 09 Backwardation

Contango At the end of September 2009, the difference between the 2009 prices of a

European CO2 allowance (EUA) and a Certified Emission Reduction credit (CER) had narrowed to €0.95. Since 2007, the spread has fluctuated between €1 and €9 and, since last June, within a narrower range of €1 ~ €2, with the CER price below the EUA. This spread is due to the partial fungibility of EUAs and the CERs since the European industries covered by the EU ETS can use either of these two assets for compliance, with the limit for CER for up to 13.5% of their allocation from 2008 to 2012. How do we explain the variations of this price spread? The results of our econometric study1 _{shed some light on these drivers.}

The price fundamentals of the EUA in Phase II have been clearly identified: the supply of allowances is defined by the allocations. Demand, in the short term, depends on the level of CO2 emissions which evolve as a function of economic growth, primary energy prices and climatic conditions. Thus, price uncertainty typically relates to the level of demand. Nevertheless, events can also affect the level of supply: the Phase II allocations of Poland and Estonia may be increased depending on the outcome of the claims those countries have submitted to the EU Commission.

With regard to CERs, the secondary CER price represents the price of credit already issued by the United Nations (UN) to be delivered to buyers at a predetermined date. Our econometric analysis has confirmed that beyond its correlation with the price of the EUA, no similar short term price fundamentals for the secondary CER could be identified. The close correlation between EUA and CER prices results from the fact that Europe is the major source of demand for these credits. In Europe, industries can use a maximum import of 1,400 Mt of CER. Contrary to our expectations, the estimated quantity of credits issued by the UN is not statistically significant in the formation of the CER price.

There is greater uncertainty regarding the CER market than the EUA market. Market participants do not have exact information either with regard to the supply of CERs, nor do they know the total expected demand by 2012 or indeed the future of the project mechanisms beyond 2012. Additionally, the utilization of the CERs in Europe is restricted until 2020. These uncertainties and the limitation are directly reflected in the prices of the CER: it is lower than that of the EUA and its term structure moves in a direction opposite to that of the EUA. Contrary to EUA prices which increase as their maturity increases, for the past three months, the prices of the CER‘10, ‘11 and ‘12 have been below the price of the CER’09. This indicates that the market actors are expecting problems in future supply or the utilization of CERs on the EU ETS.

Ultimately, the EUA-CER price spread is not determined by the physical fundamentals. Instead it evolves as a function of CER and EUA regulatory information, on the one hand, and technical trading on the other hand. Some market players take advantage of this price spread although their objective has nothing to do with regulatory compliance. Its future development will depend on the CER supply and its European demand, which will be defined gradually by April 2013 (end of Phase II). Two scenarios are possible. If the supply of CER is less than 1,400 Mt, the price of CER will rise towards that of the EUA and the spread will shrink. Conversely, if the supply of CER is more than 1,400 Mt, the price of CER will disconnect from that of the EUA. The EU ETS banking rules for unused CER remain to be validated in the negotiation of a post-Kyoto climate agreement in Copenhagen.

Emilie Alberola, Maria Mansanet-Bataller, Morgan Hervé-Mignucci

[email protected]

Mission Climat – CDC Climat of Caisse des Dépôts

Julien Chevallier – [email protected]

Assistant professor,University of Paris-Dauphine

1. « The CER-EUA spread: compliance strategies and arbitrage in the EU ETS » pending publication.

EUAs and CERs: moving in lockstep?

Temperatures (°C)

• Average of BlueNext Weather indices* – France, Germany, UK and Spain – weighted by the allowances allocated to each country.

Precipitation (mm)

• Average of precipitation indices for Lyon, Oslo, Turin, Vienna and Madrid, weighted by the hydroelectric share in each country’s electric power mix.

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Production Indices

Opinion of Business Leaders

(base year 2000) 2009July variation (%)Monthly 12 months (%)Variation/ Indust. prod. (excl. construction) 89.9 -0.3% -15.0%

EU ETS sectors production* 88.4 0.1% -10.4%

Power, gas and heat 92.7 -0.3% -5.5%

Cement 76.0 2.0% -16.7%

Iron and steel 75.3 3.4% -28.7%

Refineries 92.8 0.0% -7.6%

Paper and pulp 91.5 0.2% -11.1%

Glass 81.8 -0.8% -16.4%

Ceramics 74.5 0.7% -29.7%

Metal ore 76.7 -18.8% -29.4%

EU 27 ₂₀₀₉July August₂₀₀₉ Sept.₂₀₀₉

Industrial Confidence Indicator -30 -26 -24

Index, Base Year 2000 109 89 91 93 95 97 99 101 103 105 107 85 87 Aug 08 Oct 08 Dec 08 Feb 09 Apr 09 May 09 Jun 09 Jul 08 Jul 09 Sep 08 Nov 08 Jan 09 Mar 09 EU ETS Sectors Production (EU27) Industrial Production (EU27) 68 73 78 83 88 93 98 108 103 113 Jan 05 Index, Base Year 2000 Apr

05 Jul05 Oct05 Jan06 Apr06 Jul06 Oct06 Jan07 Apr07 Jul07 Oct07 Jan08 Apr08 Jul08 Oct08 Jan09 Apr09 Jul09 Industrial Production (EU27)

Iron & Steel (EU27) Source: Mission Climat – Caisse des Dépôts based on data provided

by Météo-France and BlueNext

Note: Production indexes reflect recent adjustments made by Eurostat

The European temperature index remained slightly above its ten-year average in September (16.7°C vs. 16.5°C). With the exception of the United Kingdom which had four consecutive months of below average temperatures (by -0.7°C in September), Spain, France and Germany all experienced slightly warmer-than-average September. Precipitation across Europe was below its ten-year average in September in all of the five cities (Lyon, Madrid, Oslo, Turin, and Vienna) we follow. Precipitation has been below its ten-year-average in Spain since February 2009; as such its reservoir levels remained below their ten-year averages (by 4.5% in September). In the Nordic countries the reservoir levels are approaching their ten-year averages, thanks to above-average rainfall in July and August. * The BlueNext Weather indices are defined on the basis of average temperatures, weighted by the population of the representative regions making up each country.

Sectoral Focus:

Total Production and Production

by EU ETS Sectors

Source: European Commission Source: Eurostat

May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 2 0 4 6 8 10 12 14 16 18 20 22 Temperature (° C) Historical european temperature 1999-2008 European temperature index

Reservoir Content for Electricity Production

• Spread between the monthly rate of reservoir levels (%) and the ten-year average rate (%).

– 18 – 14 – 10 – 6 – 2 6 10 14 2 – 22 Points of % Sep

08 Oct08 Nov08 Dec08 Jan09 Feb09 Mar09 Apr09 May09 Jun09 Jul09 Aug09 Sep09

Nordic Countries Spain

The industrial production index was stable in July (-0.3% for all industries, +0.1% for ETS sectors), though 15% below last year’s levels (-10.4% for ETS sectors). Except metal ore production, the ETS sectors’ productions were stable: cement and iron and steel sectors experienced a respective 2% and 3.4% increase while the electricity and heat sector declined by 0.3%. The economic rebound, after the crisis which induced annual declines from -30% for ceramics to -5.5% for electricity and heat, is reflected in the continued increase of the confidence indicator (+2 in September). This month’s focus is on the iron and steel sector, around 240 installations accounting for roughly 8%, or 135 Mt, of annual ETS emissions. The crisis strongly impacted demand from construction, mechanical engineering and automobile industries: the production dropped precipitately in late 2008 when many European factories temporarily shut down. The production has resumed in June and July in parallel to renewed increases in industrial new orders in the manufacturing industry (respectively. +4.0 and +2.6). It is still more than 20 points below its 2000 levels. * Index weighted by EU ETS sectors’ weight in average total allocation over 2005-2007.

Source: Eurostat August September Monthly average (°C) - 2009 20.3 16.7 Monthly average (°C) - 1999-2008 19.6 16.5 Monthly minimum (°C) - 2009 16.5 15.1 Monthly maximum (°C) - 2009 24.1 20.9 August September Monthly precipitation - 2009 71.9 32.0** Monthly precipitation - 1999-2008 74.4 75.1

Cumulative over 12 months 578.5 421.6**

Cumulative over 12 months - 1999-2008 491.2 431.3

Source: Mission Climat – Caisse des Dépôts based on data provided by Météo-France ** Precipitation for Turin for September may not be comparable as it came from a different source.

Wrestling over the Phase II NAP (2008-2012)

September again confirmed the de-coupling of European electricity and gas markets from global oil and coal markets. The oil and coal prices both declined by about 6% while gas prices increased by 5% reversing the downward trend established more than one year ago. Prices for oil and gas fell for most of the year reflecting lower demand caused by global recession. However, without a cartel such as OPEC to adjust production levels in response to lower demand, gas prices fell substantially more than those of oil. Now that the economy is slowly recovering and winter is fast approaching, gas prices could continue to rise. As a consequence, CO2 switch price rose to 4.91€/t from 1.98€/t in August.

Energy Prices

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• Price of electricity and price difference between electricity and primary energy prices

• Primary energy prices

Source: Reuters, BlueNext, PowerNext, Mission Climat - Caisse des Dépôts

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08 Oct08 Nov08 Dec08 Jan09 Feb09 Mar09 Apr09 May09 Sep09

€ /MWh 40 35 30 20 25 15 10 5 Gas Zeebrugge Coal CIF ARA August 2009 September 2009

Average closing price

Brent, in $/barrel 73.06 $/B 68.15 $/B

Natural gas Zeebrugge

month ahead 2.69 e/MMBTU 2.73 e/MMBTU

Amsterdam coal

CIF ARA month ahead 51.21 e/t 47.10 e/t

Powernext Futures™ month ahead

Base 40.14 e/MWh 46.90 e/MWh

Peak 52.08 e/MWh 63.47 e/MWh

BlueNext spot price 14.61 e/t 14.17 e/t

Clean spark spread 17.72 e/MWh 24.58 e/MWh

Clean dark spread 11.92 e/MWh 20.36 e/MWh

CO2 switch price coal/gas 1.98 e/t 4.91 e/t

- 5 20 45 70 95 120 May

09 Jun09 Jul09 Aug09 Sep

08 Oct08 Nov08 Dec08 Jan09 Feb09 Mar09 Apr09 Sep09

€

/MWh

Clean dark spread Tendances Carbone in €/MWh

Electricity Powernext FuturesTM

month ahead Base in €/MWh

Clean spark spread Tendances Carbone in €/MWh

On September 23, the European Court of First Instance (CFI) overruled the decision of the EU Commission concerning the NAPs for the second period submitted by Estonia and Poland. The Commission will explore two options: (1) Issuing a new decision based on “proper” criteria before 23 December 2009; (2) Appealing the CFI ruling, on a point of law, before 23 November 2009. Six other Eastern European countries may contest their NAPs as well. In total, that represents a potential additional 162 million allowances.

The UK announced a non-competitive auction for phase II allowances to be held in January 2010. 20.6 million phase II allowances have been auctioned in the UK since 2008.

On September 18, 2009, the EU member states agreed on a provisional list of 164 industrial activities that are exposed to international competition which will continue to benefit from 100% free allowances after 2012. After examination by the European Parliament, the list should be ratified by the European Commission at the end of the year.

* 2007 only. ** Estimation Source: Mission Climat – Caisse des Dépôts, from European Comission.

Member State the Member State NAP proposed by

(Mt) NAP authorized by the Commission (Mt) Average verified emissions in phase 1 (2005-2007 Mt) 2008 verified emissions Gap between allocation authorized and 2008 emissions (% of total allocation authorized) Poland 284.6 208.5 207.3 204.1 2.1% Czech Republic 102 86.8 84.6 80.1 7.7% Romania 95.7 75.9 69.6* 63.6 16.2% Bulgaria 67.6 42.3 39.1* 38.3 9.5% Estonia 24.3 12.7 13.4 13.5 -6.3% Lithuania 16.6 8.9 6.4 6.1 31.5% Cyprus 7.12 5.5 5.2 5.4** 1.8% Latvia 7.8 3.3 2.9 2.7 18.2% Total 605.72 443.9 319.8 408.4 8.0%

BlueNext SA

Contact: Pierre Guigon, Tel. : +33 1 73 03 73 47 [email protected]

5, boulevard Montmartre - 75002 Paris The Mission Climat of Caisse des Dépôts is a research centre on climate change economics.

It is part of CDC Climat, the department of Caisse des Dépôts in charge of carbon finance activities. The opinions and analysis herein do not bind BlueNext SA.

ISSN : 1953- 0439

Caisse des Dépôts – Mission Climat Publication manager: Benoît Leguet Contact: May Armstrong, Tel: + 33 1 58 50 76 27 [email protected]

Dashboard

Source: BlueNext, ECX, Point Carbon

European Union Emissions Trading Scheme

Source: Météo-France, NordPool, www.mamr.es

Economic activity

Source: Eurostat

A methodological note can be downloaded: www.caissedesdepots.fr/missionclimat

Energy prices

Source: Reuters, Powernext, Mission Climat – Caisse des Dépôts Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Spot Market

(BlueNext)

Phase II

Average closing price in e 23.73 20.91 17.02 14.96 12.68 9.46 11.23 12.92 14.51 13.25 13.75 14.61 14.17 Total monthly volume in kt 28,435 27,605 67,905 87,597 124,078 225,873 82,113 116,182 187,769 85,982 90,411 27,557 34,664

Futures Market (ECX)

Dec. 2008/Dec. 2009

Average closing price in e 23.95 21.07 17.07 14.86 13.19 9.71 11.57 13.31 14.86 13.49 13.91 14.72 14.24 Dec. 2012 Average

closing price in e 28.17 24.39 19.99 17.79 14.82 11.17 13.98 15.57 17.22 15.66 16.23 16.89 16.03

Total monthly volume in kt 182,974 324,942 208,239 120,891 200,275 306,566 400,652 374,589 312,783, 339,388 317,834 203,685 302,872 Total European market volume in kt (PointCarbon) 276,524 355,007 303,597 209,082 345,770 526,222 506,996 489,474 489,180 469,291 441,631 236,398 367,693

International Kyoto Credit Market

Source: Reuters, LEBA, NordPool, Nymex Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Spot Market

(BlueNext)

Average Closing Price in e 19.64 17.92 15.02 13.46 11.67 9.11 10.59 11.02 12.23 11.61 12.45 12.99 12.81

Total monthly volume in kt 880 842 1,146 2,511 4,084 2,764 1,936 5,264 3,357 1,881 3,164 1,870 2,403

Futures Market Average Closing Price in e 19.69 17.89 14.84 13.46 11.43 8.86 10.45 10.97 12.24 11.61 12.43 12.99 12.73

Total monthly volume in kt 52,223 44,978 87,324 36,511 37,921 69,135 44,384 58,649 41,038 43,633 81,959 45,097 72,162

Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Brent crude oil, 1st _{maturity, in $/baril 100.84 73.68 54.75 43.51 45.71 43.87 47.39 51.39 58.59 69.29 65.75 73.06 68.15}

Natural gas Zeebrugge, 1st _{maturity date, in e/MMBTU 9.45 9.39 7.67 6.36 6.36 5.46 3.55 3.33 3.18 3.15 2.71 2.69 2.73}

Coal CIF ARA, 1st _{maturity date, in e/tonne 122.99 97.00 74.10 59.10 61.16 61.53 44.97 50.31 45.63 47.64 48.03 51.21 47.10} Powernext FuturesTM

month ahead, in e/MWh

Base 94.41 109.40 79.06 70.04 62.75 47.00 35.51 31.70 34.98 39.07 31.68 40.14 46.90

Peak 123.09 150.17 102.66 91.00 81.16 58.59 43.68 41.70 47.25 52.24 43.18 52.08 63.47

Difference in prices of electricity and of natural gas, corrected

for the price of CO2: Clean Spark spread in e/MWh 26.72 42.87 26.16 25.19 19.31 10.76 9.74 6.44 9.80 14.47 10.13 17.72 24.58 Difference in prices of electricity and of coal, corrected

for the price of CO2: Clean Dark spread in e/MWh 36.53 60.98 41.76 39.15 33.55 21.80 12.11 5.22 8.50 12.92 5.18 11.92 20.36

CO2 switch price coal/gas in e/tonne 42.18 58.46 50.21 43.23 42.66 33.82 16.55 10.58 11.60 9.92 4.12 1.98 4.91

Precipitations (°C) Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09

Vienna - difference monthly and decennial precipitation -5.0 -14.2 6.3 3.8 2.1 7.3 30.6 -34.8 -3.7 118.5 35.5 -15.3 -38.3

Madrid - difference monthly and decennial precipitation 68.8 62.4 -42.2 5.6 -0.8 8.9 -23.2 -21.9 -12.4 -3.3 -4.5 -3.5 -8.3 Lyon - difference monthly and decennial precipitation 87.8 -14.6 -43.4 -17.5 -8.2 76.7 -27.5 -42.9 -39.3 11.1 -21.7 -51.7 -30.1 Oslo - difference monthly and decennial precipitation -27.8 28.0 -29.6 -12.1 14.3 11.5 6.1 -16.7 -22.1 -42.6 76.9 34.4 -46.5 Turin - difference monthly and decennial precipitation 211.5 -43.3 80.2 158.3 5.2 20.9 94.5 149.7 -39.2 25.9 -13.6 -9.0 -82.2* Hydraulic Reservoirs – Spread between the monthly rate of reservoir capacity and the decennial average rate.

Spain -1.3 -5 -6.2 -3.6 -5.1 0.8 -3.1 -5.5 -7.8 -5.9 -5.3 -4.8 -4.5

Nordic countries -5.4 -1.8 -2.3 -5.6 -6.5 -7.8 -9.2 -0.5 -2.9 -9.7 -9.3 -5 -0.6

Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Total industry production index (excluding construction and seasonally adjusted), base = 2000

Europe 27 103.85 101.61 98.9 96.11 93.7 91.81 90.84 90.09 90.18 90.1 89.85 -

-Weather

Temperatures (°C) Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09

Germany - difference monthly and decennial average -1.3 -0.3 0.5 -0.2 -3.3 -1.7 -0.1 3.2 0.5 -1.3 0.5 0.9 1.0

Spain - difference monthly and decennial average -0.6 -1.2 -1.6 -1.1 -0.9 -0.8 -0.4 -0.9 1.0 0.7 0.7 1.1 0.1

France - difference monthly and decennial average -1.6 -1.3 0.2 -1.2 -2.6 -1.4 -0.6 1.2 0.7 -0.6 0.3 1.0 0.6

UK - difference monthly and decennial average -1.6 -1.6 -0.4 -1.3 -2.2 -1.5 0.0 0.7 -0.2 -0.4 -0.9 -0.5 -0.7

Source: BlueNext