By Tim Atkinson, founder of ETS Markets

After a period of relative calm towards the end of 2015, volatility has returned in force to the EU carbon market in 2016, with EU Allowance prices falling as much as 32% since the start of the year and intraday price swings of over 50 cents.

Much debate has followed from analysts, commentators and newswires on the reasons for this sharp drop and volatility in prices.

The carbon market is no stranger to sharp price swings (remember Mar. 2014 and Feb. 2015), however past moves were mainly due to EU emissions data and news and rumours about policy measures such as Backloading and the MSR.

Indeed many in the market felt the European Commission had finally put in place policies that removed the uncertainty and would push prices upwards.

But the recent price drop has been more significant and also on the back of little change in the fundamentals that saw front-year EUAs approach €9 in Q4 2015, a rise broadly in line with the mean estimate of 11 analysts surveyed by Carbon Pulse in October.

Whether it is due to aggressive speculators, cash-strapped industrials or seemingly absent utilities, prices are being driven by unpredictable factors that blow all forecasts based on analysis of the fundamentals out of the water.

Whilst this is often the reality of a market-based approach, spare a thought for the energy or finance manager of a SME operator who has been tasked with the role of managing the firm’s EU ETS position.

Such companies may not dominate the market, but they constitute the bulk of the 11,000 sites covered by the EU ETS.

In previous years, favourable allocations and banked surpluses may have allowed them to sit on the sidelines, but tighter targets mean many now have no choice but to enter the market.

Getting approval for budgets and trading decisions often take time, so managing all this in a fast-moving market can be tricky.

Operators that have a trading strategy and infrastructure are best placed to benefit or manage price risk. For example, an operator who already has their 2015 emissions data would have been able to react early and purchase EUAs at favourable prices below €6.

In addition, if budgets allowed, operators may have decided to go further and purchase a portion of any forecasted future allowance shortfalls for the remainder of Phase 3 (2013-2020).

Compliance-driven traders increasingly have little choice over whether they need to enter the market, but by developing a trading strategy, identifying routes to market, and keeping in touch with price activity, they can at least control when they do.

Tim Atkinson is the founder of UK-based ETS Markets, which assists companies to understand the EU Emissions Trading Scheme (ETS), develop an effective emissions trading strategy, and execute transactions in the carbon market.