Carbon market speculators get caught short

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London, 19 February: Yesterday saw the largest ever volumes in Europe’s carbon market, as speculators betting on a further collapse in prices found themselves caught out.

More than 50 million tonnes of carbon dioxide equivalent (CO2e) were traded yesterday, boosted by the largest single-day price gain for almost three years.

The consensus among traders is that the record volume and price rise were due to short-covering, primarily from speculators who had sold EU allowances (EUAs) on the expectation that prices would fall further when Germany – the largest emitter in the EU Emissions Trading Scheme – finished issuing its 2009 vintage permits yesterday.

“A significant number of people were of the view that the German allocation would drive prices down, it seems,” said Louis Redshaw, director of environmental markets at Barclays Capital in London.

London-based futures exchange the European Climate Exchange (ECX) handled 39.3 million EUA and certified emission reduction (CER) futures and options yesterday, the bulk of which – 24.8 million, each representing one tonne of CO2e – was for EUA futures. BlueNext, the Paris-based spot exchange, handled 14.6 million EUAs.

This came as EUA prices posted the largest single-day gain since May 2006 according to ECX data, with the December 2009 allowance price rising 12% to end at €9.68 ($12.30) – ending a downwards spiral which has seen prices trade at historic lows of €8.20. This compares with prices in excess of €30 last summer.

“A lot of traders were probably short and had to cover,” said Daniel Mulder, head of emissions trading at RBS Sempra Commodities in London. “No one’s getting and selling EUAs on the same day … industrials have more things to do. Some bigger players look [at their position] monthly, some quarterly, some at the end of the year, when they have the verification report.”

In contrast to energy companies, industrial emitters have typically been allocated sufficient allowances to cover their expected emissions. However, as the economic downturn bites, demand for their products has fallen and they find themselves with surplus allowances and have been heavy sellers in recent weeks.

Rising gas prices also contributed, traders said, as it increased the profitability of burning coal for power generation. Since coal is more carbon-intensive than gas, increased coal use leads to increased demand for EUAs.

“What really confirms that it was short-covering in particular is that everyone else is looking soft today, but carbon continues to go up,” Redshaw added, referring to other energy commodities with which carbon often moves in sympathy. As Environmental Finance went to press, December 2009 futures were trading around €10.50 on the ECX, up 8% on the day.

“The most encouraging thing is that we’ve had a positive movement in price … and a lot of volume is flowing off the back of that,” said ECX’s CEO, Patrick Birley. By 14.30 GMT today, the exchange had handled 20 million contracts