Emitters in the EU ETS are expected to surrender 225-250 million Kyoto offsets against their 2014 emissions, analysts said on Thursday, adding that they expect companies to use up most of their remaining entitlement to swap for EUAs.
“We see little option value left in holding onto the entitlement to switch (EUAs for CERs),” London-based Energy Aspects wrote in a note to clients, adding that it predicts that 250 million units will be handed in.
“The option on the (EUA-CER) spread is really only valuable if the spread could widen from further reductions in the offset price. If the spread can only widen due to appreciation in EUAs, then it is simply better to hold the EUA as there is certainly much more theoretical potential upside than downside for CER prices, as those prices are never likely to be negative.”
Energy Aspects added that another reason for a high surrender level is that Kyoto credits issued against pre-2013 emissions cuts – which account for the vast majority in circulation currently – are no longer eligible in the EU ETS following a March 31, 2015 deadline.
Thomson Reuters Point Carbon said this has caused a large price difference for credits delivered before and after this deadline of around €0.50, likely incentivising operators to utilise a large chunk of their remaining credit limits to cover last year’s emissions.
Point Carbon estimated that a total 225 million credits will be turned in for 2014 compliance, including 25 million that were swapped for EUAs between May and October 2014.
CERs currently trade for around €0.50 each on ICE Futures Europe, while EUAs are valued at some €7.50.
Apr. 30 marks the annual deadline for emitters to surrender carbon units against their previous year’s emissions.
The number of Kyoto units handed in this year is due to be published by the European Commission on Monday, May 4.
PRICE IMPACT?
Energy Aspects said surrendering 250 million offsets will mean that a total 1.45 billion Kyoto credits will have been handed in out of the bloc’s estimated total usage limit of just over 1.6 billion between 2008 and 2020.
As that overall limit is calculated based on annual emission figures, Energy Aspects calculated that it currently stands at around 1.56 billion and would rise by further 55 million tonnes by 2020 – an amount too small to be able to absorb the CER market’s massive oversupply.
“It is hard to see much upside for CER prices from current levels,” it said.
“The actual number of offsets submitted will be watched by the market, although even a low number from the 100-250 million-tonne range (which was forecast by a survey of analysts) is unlikely to considerably move CER prices,” Energy Aspects wrote.
It added that with so many CDM projects, even if CER prices rose the vast stock of credits sitting in pending accounts could be transferred out, while projects that have continued to cut CO2 without requesting credits could pursue them, weighing on prices.
A larger number of offsets surrendered for 2014 could be slightly bullish for EUA prices as it means less future CER demand, but conversely, it could also be slightly bearish because that would mean there are more EUAs in circulation.
“Given these are similar impacts in terms of hedge provision, the directional signals should not be overly strong on the EUA market regardless of the number (used for 2014),” Energy Aspects added.
By Mike Szabo – mike@carbon-pulse.com
