Brexit and coronavirus keep carbon under pressure
The UK announced to restart auctioning emission allowances on Wednesday, 4 March. After more than one year of suspended auctions, the volume to be offered will be more than 120 million for 2019 and 2020. It has to be seen, if there is enough demand to absorb this supply of allowances in a market hit by the spread of the coronavirus.
Since 2 January, 2020 the price of the benchmark carbon contract moved in a range of 3 euros, between 22.90 and 25.90 euros. On 21 February, before the publication of the British auction calendar the price closed at 25.63 euro. The next trading day was Monday, 24 February when the price plummeted by more than 4% and the contract closed the month at 23.61 euro, losing 1.1% in a monthly comparison.
At first sight, the decline could be attributed to the publication of the British auction calendar, but actually the much awaited information was rather positive. The publication of the calendar reduced the uncertainty about volumes and their distribution among market participants. The 5.7 million allowances offered in auctions is slightly lower than expected by the market. Traders also appreciated that the 2019 volume has not been frontloaded, but the volume has been distributed equally during the year. The one EUAA auction instead of the previously announced two could also have had a bullish effect on prices.
Auctions of British allowances restart on Wednesday, 4 March and will take place every second Wednesday on ICE until 9 December 2020. A total of 123 million allowances will be offered for the two years of 2019 and 2020. The auctions of the other EU member states on EEX will be not affected by the restart of the British auctions.
The 5.7 million volume will be halved in August, as usual. According to the calendar, the volumes from September increase to 6.8 million but this will change after the publication of the total number of allowances in circulation (TNAC) by the European Commission in May and the quantity of allowances that will be absorbed by the market stability reserve from September.
The free allocation of 2019 and 2020 British allowances started mid-February without having any major impact on the market.
The Brexit transition period ends 31 December 2020, but according to the agreement between the EU and Britain the installations can comply until the end of April 2021. They will not lose their access to their Registry accounts and to their allowances until the end of the next compliance period in April 2021.
Unfortunately, the number of corona virus cases in Europe increased in the last days of February and the negative global investor mood sent all markets lower, including the carbon market.