EUA prices ended the month and the year at €8.14/mt, a gain of 8.1% from the end of November and a 24% increase compared with December 31, 2016. Prices floated higher in the second half of December as compliance and speculative demand dominated the market, after the end of the auction programme for 2017.
Front-year futures prices reached a two-year high of €8.30/mt on December 22, but fell back in the remaining days of the month as traders took profit.
Trading volume in the front-year contract on Ice Futures was down 16% at 214 million EUAs, reflecting the holiday slowdown, but it was also the lowest December volume since 2014.
Overall, 2017 has seen a 22% increase in prices as market participants became bullish over the prospects for the market in the coming years. EU institutions agreed a wide-ranging set of reforms to the market that will take effect in 2020, as well as a doubling of the Market Stability Reserve’s withdrawal rate from 2019 through 2023.
Analysts have predicted prices should rise above €10/mt before the next phase starts in 2021, with some predictions rising to as high as €25/mt later in phase four.
The outlook for the first quarter of 2018 is mixed. The resumption of daily auctions in the first week of January should apply some downward pressure on prices, though the overall energy market has also ended 2017 on a high note and this may support EUAs.
January will see auctions totaling 66.5 million EUAs, compared with more than 70 million in January 2017. This stems mainly from a delay in the resumption of UK sales until February.
However, with the carbon market still fundamentally long and set to remain so through at least 2023, it is unlikely that price formation will be affected mainly by supply and demand until then.
Instead, it is more likely that prices will move in sympathy with overall energy trends. Carbon has shown a relatively high correlation with both power and coal prices and this is likely to continue into the first quarter.
There may also be external price drivers, including the policy direction of the new German government. Negotiations over forming a new coalition are set to continue next month, and will cover the issue of the phase-out of coal- and lignite-fired power plants.
Any significant closures will affect demand for EUAs and put further strain on the MSR as it tries to eliminate the overhang in the market, but this could be alleviated by the expected closure of two nuclear units in the coming two years. RWE’s Gudremmingem reactor will close permanently on December 31, 2017, and the next shutdown, EnBW’s Philippsburg unit, is scheduled for 2019. Less nuclear generation will require fossil-fuel and renewable replacement.
The issues over UK eligibility to participate in the market in 2018 have been solved. The UK government published on December 27 amended rules that will require British installations to submit verified emissions reports for 2018 by March 11, 2019, and to surrender EUAs no later than March 15, 2019.
The whole matter will need to be revisited for 2020, but this time the outcome will depend on the progress of the Brexit negotiations and in particular the two-year transition period.