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Liquidating Hot Air: Bargain Prices For Carbon Credits

By Andrew MacKillopMarket OverviewDec 28, 2011 09:53AM ET
www.investing.com/analysis/liquidating-hot-air:-bargain-prices-for-carbon-credits-109920
Liquidating Hot Air: Bargain Prices For Carbon Credits
By Andrew MacKillop   |  Dec 28, 2011 09:53AM ET
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Through a long series of ironic twists and turns, Europe's mandatory CO2 emissions allowances (called EUAs) traced a boom and bust very similar to the USA's voluntary scheme for "monetizing" carbon with the supposed goal of generating the financial support needed for Energy Transition away from fossil energy to low carbon green energy. One of the many ironies is that 2011 in Europe was one of the warmest, or least cold years ever recorded, but this has done little to restore credibility and more important, the cash flows needed to keep high-living carbon traders at their playstations rolling the dice.

The US emissions market CCX was at one time, at the start of the century apparently set for big success. Not only was a young Barack Obama a board member of the Joyce Foundation which seed funded the fledgling CCX, but over the years it attracted all the right, big name climate investors such as Goldman Sachs, Climate Change Capital and Al Gore’s Generation Investment Management.

Then funny things happened on the path to the CCX growing like the expanding Universe in the few nanoseconds near its start: forecasts that its turnover would first hit $500 billion a year, then $10 trillion a year were dashed. The highly anticipated looting of taxpayers and consumers — to save the planet -- imploded following its high water mark in the US with the passage of the Waxman-Markey bill (the American Clean Energy and Security Act of 2009), modelled on Europe's enabling regulations, then laws starting with the 2005 start of the European Emissions Trading Scheme.

With ongoing economic recession, Climategate, Arab Spring, Europe's debt crisis, Occupy Wall Street and the Tea Party movement, what once seemed like a sure thing became anything but. Europe's surviving scheme, the world's last or only, is now a target for increasing "benign neglect". Its life support of investor support is weakening, shown by the falling value of EUAs: in the high times of 2009 these could fetch more than 20 euro or $30 per ton of CO2, but now hover around 8 euro with occasional shifts below 6 euro, but these numbers are still far from the CCX's last days, at the end of 2010, when a US voluntary market credit fetched 5 US cents for the right to emit 1 ton of CO2.

SELLING OUT WHILE YOU CAN

The great thing about carbon credits is they can be printed, like any fiat money or stock certificate for a "cant fail" business or company: in 2009, European ETS credits of all kinds rode on about 2 billion tons of CO2, which if nothing like the "$500 billion a year" hopes of emissions boomers like Al Gore, was a nice turnover on wholly printed paper "value". However, just like any paper promise thrown on the pinwheels of the global fiancial casino, the timing has to be right, and in particular you have to know when the market is going to crash - and sell out fast.

This week's news is the European Investment Bank may have started selling 2013 carbon allowances in a 1.8 billion-euro ($2.4-billion) program, but will ensure this news is denied as long as possible to prevent EUA prices crashing too fast, as we would expect from an institution dealing in long-term investment under all the regulations applying to such institutions. The comparison with the oil market - always the Big Brother role model for carbon boomers - is shown by market comments from analysts, saying that when governments release oil stocks "to lend volume to the market" they generally start leaking the news a month or so ahead, to see how the market reacts to the news. More important, even in emergency situations where a possible market crash could result (and for oil, where price gains will go on happening despite the released stocks), governments and their agencies will forewarn the market.

Europe's EIB receives carbon permits from the European Commission, the regulator of the world’s largest emissions market, at the beginning of December and has to sell them within 10 months. Running a check on carbon market price trends, today, shows this latest wad of paper value could do serious and even terminal damage to Europe's ETS. Generally, EUAs and other carbon paper, like sCERs and CDMs slump in value for a period of around 12 - 30 days after each dumping, but this year's possibly panic-driven sale may be different: carbon prices could go down and stay down. Their only hope, by another twist of irony, is that oil prices soar.

STEALTH SELLING

The EIB may have begun privately selling a first tranche of 200 million EU permits from the post-2012 third phase of the EU’s emissions trading system, programmed for 2013, to fund renewable energy and carbon capture projects in 2012: the modest and downsized scope of these projects is shown by the hoped-for product of the sale, about 1.8 billion euro, or just about enough for 300 MW of offshore windfarms. As far as carbon capture is concerned the price tags are much higher, but the goal of this possibly illegal early sale of 2013 credits is of course to Save the Planet.

Trading companies buying 2013 European Union carbon permits directly from the EIB are already accused of possibly having “privileged information”, which is coded language for suspecting the permits will be handed out to EIB-friendly players then dumped in a hit and run move. To be sure, the EIB claims that over-the-counter transactions “will be structured to ensure best competition", but the bomb is coming. In a completely different market from oil, where releases of symbolic quantities of government-controlled stocks are supposed to stabilize and lower daily prices, but do not, the EIB carbon finance play starting in January - but in theory able to be stretched to October - may have suprisingly big downward price impacts, despite the exact opposite being hoped for.

Giving us an idea on when the EIB will sell these permits, which could extend to 300 million tons of CO2 credits according to information available on European Commission web sites, the EIB says it will disclose nothing about these sales until "about January 11th" in its first monthly report on sales of carbon allowances from the new reserve.

EU carbon for 2013 had already dropped to a record low of 7.26 euros a metric ton on Dec 14 on the ICE Futures Europe exchange in London. The front-year contract is trading at about 8.70 euros this week. The EIB's move promises more downward movement in paper carbon - unless oil prices rise.
Liquidating Hot Air: Bargain Prices For Carbon Credits
 

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Liquidating Hot Air: Bargain Prices For Carbon Credits

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