EU Allowances fell back from a one-week high on Wednesday as gains spurred by a strong government auction were offset by uncertainty over MSR reforms.
The Dec-15 contract jumped 15 cents to a peak of €6.88 on ICE after the UK’s auction of 3.1 million spot allowances cleared a cent above market, the second day in a row a sale has bucked a recent pattern of below-market prices.
But the benchmark front-year contract failed to hang on to the gains and settled just one cent higher at €6.79, as Finland added its name to the substantial minority of nations unfavourable to the MSR starting before 2021.
Traders said Finland’s announcement added to the uncertainty over MSR talks, which are due to come to a head when officials meet on March 25.
“I think we’re likely to stay between €6.60 and 6.90 without a marked improvement in the political outlook,” one trader said.
He added that this would likely require governments to agree an MSR position with a start earlier than 2021 and backloaded and unallocated allowances directly entering the reserve.
EU president Latvia, chairing the MSR talks, is expected to table a fresh proposal ahead of the meeting.
EUA prices fell sharply after the country’s previous compromise last Thursday failed to include the fate of at least 600 million unallocated allowances.
Market watchers said prices were also held in check on Wednesday by the European Commission’s confirmation overnight that a third of 2015’s free EUA allocation had not yet been distributed.
The Commission’s update showed factories in Finland, Italy, Poland and Spain had yet to receive their permits – outstanding volume that could put prices under pressure.
“It won’t just be Polish industrials selling, we are seeing industry selling across the bloc ahead of compliance just as in previous years,” the trader added.
Industrial companies have traditionally sold some of their EUA surplus in the weeks ahead of the April 1 annual deadline, but traders questioned whether this would continue due to the much tighter market outlook for the sector towards the end of the decade, when their annual free allocation dwindles as the emission cap lowers.
Carbon prices were also supported by a 35-cent gain in baseload front-year German power prices, which ended at €32.30/MWh on EEX.
By Ben Garside – ben@carbon-pulse.com
