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The 3 Big Changes of Phase 3


The Market Squeeze – tighter cap, lower free allocation, new entrants, backloading, limited offsets, speculation and volatility

1. Free allocations are massively reduced , the cap is lower and its reach extended

  • 0% free allocations to power companies (a few Eastern and Southern European countries can give 70% free allocations in 2013 decreasing to 0% in 2020) 
  • Remaining sectors 80% free allocations in 2013 linearly decreasing to 30% in 2020 – sectors subject to carbon leakage still receive 100% (a new carbon leakage sector list is being prepared and will apply from 2015)
  • Average Phase 3 cap is 11% lower than Phase 2 at 1.85bn tonnes emitted p.a.
  • The cap is now centrally set and will decline by at least 1.74% a year, so that emissions in 2020 will be at least 21% below their level in 2005
  • The scheme will include production of all metals (including aluminium). For some sectors, it will include the emission of other greenhouse gases in addition to carbon dioxide. Position of aviation still uncertain but could add extra demand.

What does this mean?

Companies are much more likely to have exposed positions — many that were once long will be short, especially in the later years, and acting early upon receiving the annual allocation will be key.

How we can help

Acting early doesn’t have to mean paying early. Working with us you can devise a balanced strategy that incorporates forward, swap and spot trading opportunities, ensuring you are hedged without paying for allowances until you actually need them for compliance.

Give us a call or send us an email for some more ideas.

2. Limitations in the use of CERs/ERUs for ETS compliance

  • Import limits are reduced from an average of 13.4% across ETS countries in Phase 2 to less than 6% over Phases 2 and 3 combined – see here for further details
  • Offsets cannot be used directly as compliance units but must be exchanged centrally for EUAs
  • Credits generated from eligible project types during Phase 2 can only be used for compliance until 31 March 2015
  • Credits only eligible from projects registered before 31 December 2012 unless from LDCs
  • HFC-23, N2O and Large-Hydro (>20MW) credits are no longer eligible

What does this mean?

Low prices of international credits and widening spreads with EUAs. This presents highly profitable opportunities for companies yet to use their full entitlement. Tighter eligibility requirements and restrictions on use means buying from a trusted supplier that knows the market is crucial.

How we can help

We have one of the largest portfolios of international credits in the market and can give you unique and direct access. Get in touch to request an analysis of the market fundamentals of international credits. We will also walk you through how the new exchange process works and can discuss entitlement rules with you on a country-by-country basis. Please see Making The Most of Your Entitlement for further details.

3. Backloading – significant auction reductions began mid-March

  • The European Commission’s short-term measure to address market oversupply will see EUAs temporarily withheld from government auctions : 400 million in 2014, 300 million in 2015 and 200 million in 2016
  • They are set to be re-injected into the market at the end of Phase 3: 300million in 2019 and 600 million in 2020

What does this mean?

Increased price and volatility is expected — hedging becomes more valuable. The March 2014 analyst consensus forecast from Reuters saw prices at €6.95 in Q2 2014 and €7.55 for H2, averaging €10 by 2017.

How we can help

We can supply you with an analysis of the auction calendar against projected aggregated demand and keep you up-to-date with auction results and the sentiment polls… or we can just give you our view in layman’s terms.

What Next?

The Stability Reserve

The European Commission has proposed a market stability reserve for Phase 4 that will withdraw allowances from the market in times of oversupply and store them in a reserve, which would be emptied in times of a tight market balance. Recent discussions regarding structural reform have suggested delaying some of the 2020 re-injection of backloaded EUAs and spreading it over 2021 and 2022, when the stability mechanism will be operational. This would support higher market prices as Phase 3 draws to a close. This may seem a long way off but since EUAs are bankable the market will react to developments concerning these proposals today.

Other Relevant Regulations

  • Unlimited banking of EUAs is maintained
  • Borrowing of EUAs within the period is maintained
  • Single EU Registry platform to support robustness of system
  • Harmonized rules for monitoring and verifying emissions
At Camco Clean Energy, We’d love to hear from you...

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