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Backloading approved

World Coal,

The European Parliament has voted to support an early implementation of backloading – 306 for, 276 against, 14 abstentions.

According to Thomson Reuters Point Carbon, backloading can now begin before the end of March 2014, resulting in an overall volume of 400 million allowances being withheld from the market this year. A later start would have resulted in a maximum of 300 million allowances being backloaded in 2014.

End to uncertainty

Head of EU carbon analysis at Thomson Reuters Point Carbon, Marcus Ferdinand, commented: “Today’s vote puts an end to two years of uncertainty for market participants and paves the way for 400 million allowances being withheld from the market in 2014. However, this outcome is expected and most likely already reflected in carbon prices. Therefore, I expect the upside to be limited for now and we might even see a so called ’sell the fact’ reaction, meaning that despite a positive decision in Parliament, prices could fall during the next few days as traders have priced-in the outcome – they might take profit after the decision has been made as expected”.

Ferdinand however added that “today’s outcome in Parliament should provide confidence to market participants that the auction volume will be reduced significantly this year, thereby providing a supportive signal for EUA prices in 2014, targeting €6.5/t to €7/t”.

Market stability

The last formal step in the process is for the Council to adopt the measure, which has been tentatively scheduled for 24th February.

Hæge Fjellheim, senior policy analyst at Thomson Reuters Point Carbon, explained: “This last step is a pure rubberstamping of the measure and will not prevent backloading from happening before the end of March. Once the uncertainty regarding the short-term measure is removed, we expect market participants to prepare for the reduced auction volumes, and keep an eye on the discussions around the introduction of a market stability reserve”.

The European Commission put forward a legal proposal for a structural reform mechanism dealing with the oversupply in the market. Analysts at Thomson Reuters Point Carbon estimate this will peak at 2.6 billion allowances in 2020.

Re-injection of allowances

“The interesting bit regarding the reserve proposal is that it would prevent parts of the backloaded allowances from being re-injected by the end of phase 3”, added Fjellheim.

If the reserve would be implemented as proposed, the re-injection of the 900 million allowances would be partly shifted from 2020 to 2021 and 2022, into a time period when the stability mechanism has started to operate.

“This would balance the bearish effect of a re-injection and is a very creative proposal by the Commission to smooth the transition between phase 3 and phase 4 of the EU ETS as it would significantly increase the value of backloading as a measure to work against the current oversupply,” Ferdinand concluded.

Adapted from press release by Katie Woodward

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