EU ETS - any fundamental drivers left?

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Phillip Norman Merritt
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1 EU ETS - any fundamental drivers left? 4 th annual European Emissions Markets conference 26 Sept 2012, Brussels Marcus Ferdinand, Senior Market Analyst

2 Setting the scene Market awaked from a long sleep beginning of 2011 EUAs very volatile so far in 2012, but staying at low price levels Market reacts very often to movements in surrounding energy markets The market is long between Why is the EUA price > 0/t and what is driving prices? Why is the market reacting more to a Bernanke statement than to changes in SRMC?

3 The context: market is oversupplied Mt annually Surplus of 1.8 billion (EUAs + credit limit) Mt cumulative EU 20% annual EU 20% cumulative

4 Uncertainty leads to higher volatility 90% 20 40d volatility (%) 80% 70% 60% 50% 40% 30% 20% 10% Dec-12 EUA pice ( /t) 0% 0 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Monthly average EUA volatility (40d in %) Monthly average Dec-12 EUA price ( /t)

5 Market fundamentals lose importance a new era or just a snap-shot? EUA price indexed (%) Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 EUA price indexed (Dec-12) Emissions change indexed (only fuel price & weather effect) Jul-11 Oct-11 Jan-12 Apr-12 Jul Emissions change indexed (%)

6 Fundamentals change over time Power economics and fuel prices Trading behavior CDM/JI volume+ policy Politics and regulations Economy Investment decisions

7 5 What would it take to balance the market until 2020? Either a higher GDP... EU real GDP growth (%) Annual average GDP growth of around 4.8%! July 2012 GDP forecast

8 ...or political action Annual demand-supply balance (Mt) Mt back-load 1200 cancellation Business-as-usual No back-load No cancellation Overall demand-supply balance (Mt) -400 Note: Includes assumptions on power forward hedging, use of credits Source: Thomson Reuters Point Carbon -1600

9 It s all about policy...or not?! Back-loading and permanent cancellation Depends on political willingness to tighten the system Back-loading only does not play the trick Only permanent cancellation significantly changes the balance Link between EU ETS and Australian scheme One way link from 2015 EUA demand from Australia low Price impact depends on permanent cancellation

10 EUAs & CERs - A long relationship is over?! d correlation Dec-12 EUA and CER prices Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12

11 Conclusion: fundamentals fundamentals Carbon market is reacting to fundamentals...but it is long! In a long market the price is set by sentiment rather than abatement potential Main fundamental driver is the discussion on system design (and this won t change soon) Return to more fundamental price driver is dependent on the political agenda Towards the end of phase 3 the market is expected to react to traditional fundamental price driver again For now, the visible fundamental driver is market sentiment

12 Thank you for your attention! Marcus Ferdinand Senior Market Analyst, Point Carbon Phone: Mobile:

13 DISCLAIMER The data provided in this report were prepared by Thomson Reuters Point Carbon s Trading Analytics and Research division. Publications of Thomson Reuters Point Carbon s Trading Analytics and Research division are provided for information purposes only. Prices are indicative and Thomson Reuters Point Carbon does not offer to buy or sell or solicit offers to buy or sell any financial instrument or offer recommendations to purchase, hold or sell any commodity or make any other investment decision. Other than disclosures relating to Thomson Reuters Point Carbon, the information contained in this publication has been obtained from sources that Thomson Reuters Point Carbon believes to be reliable, but no representation or warranty, express or implied, is made as to the accuracy or completeness of this information. The opinions and views expressed in this publication are those of Thomson Reuters Point Carbon and are subject to change without notice, and Thomson Reuters Point Carbon has no obligation to update either the opinions or the information contained in this publication. Thomson Reuters Point Carbon s Trading Analytics and Research division receives compensation for its reports. Thomson Reuters Point Carbon s Trading Analytics and Research division reports are published on a subscription basis and are not issued at the request of any client of Thomson Reuters Point Carbon. Copyright 2012 by Thomson Reuters Point Carbon. All rights reserved.

14 Price impact of back-loading/cancellation ( /t) 2013* 2014* 2015* ( ) No political intervention Back-load Back-load and cancel 400 Mt Mt Mt Mt Mt Mt *During we assume that market participants consider equal likelihood for the possibility of a re-injection and a permanent cancellation. Therefore, the price path between 2013 and 2015 is equal for the comparable two scenarios (backloading-only and cancellation) during these three years.

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