September 14, 2018 / 1:38 PM / a month ago

Europe's carbon market bull run hits a wall

LONDON, Sept 14 (Reuters) - European carbon, the year’s best-performing commodity, suffered its biggest fall in a decade this week after a surge in prices triggered a call for government intervention and weak auction demand.

Losses by a Norwegian power trader that left a $133 million hole in the Nasdaq clearing house’s contingency plan added to market jitters, analysts said.

Benchmark EU Allowances (EUAs) jumped 30 percent in just four trading sessions, hitting a 10-year high above 25 euros a tonne, before a sell-off kicked in.

They were trading at 19.01 at 1318 GMT on Friday, off about 18 percent on the week.

POLAND

After EUAs jumped to 25 euros, Poland said it was time for the European Commission to act.

“The situation calls for intervention. We need to ask the European Commission to look into it,” Energy Minister Krzysztof Tchorzewski told state-run news agency PAP.

“It wasn’t the only factor but the call from Poland certainly spooked the market,” one carbon trader said, speaking on condition of anonymity.

Poland is wary of high carbon prices as that adds costs for its utilities, which generate most of their power from polluting coal.

“It is the first call (for intervention) but I would imagine that the Visgard bloc might follow suit,” said Nick Campbell, a director at consultancy Inspired Energy, referring to the Czech Republic, Hungary and Slovakia.

AUCTION

The high prices slowed demand at Thursday’s EU EUA auction, however, with a cover ratio of 3.21, lower than recent sales and a signal to traders that demand was dwindling.

Other negatives for carbon this week included Thursday’s unwinding of positions across the European energy complex after losses by the Norwegian power trader.

“This will make a lot of market participants unsure about trading schemes,” said Martin Andreas Vik, an adviser to the Norwegian Water Resources and Energy Directorate.

MARKET REFORMS

While analysts doubted Poland would be successful in prompting the EU to act to curb carbon prices, the market hitting 25 euros did reignite analysis of reforms set to start next year, including the Market Stability Reserve (MSR), which will remove some surplus EUAs from the market.

The EU’s Emissions Trading System (ETS) charges more than 11,000 energy-intensive factories and power stations for every tonne of carbon dioxide they emit.

It was set up in 2005 as part of EU efforts to cut greenhouse gas emissions by 43 percent by 2030.

Yet the market has suffered from excess supply since the financial crisis, a problem set to be addressed by measures such as the MSR.

Market intervention could also take the form of the EU actually returning surplus EUAs to the market in the event of runaway prices.

Reuters analysts estimated prices would have to hold at 25 euros a tonne for six months to meet intervention criteria under article 29a of the EU’s carbon market rules.

However, under article 29a, intervention to return allowances would only be triggered if the price rise was not rooted in fundamental reasons.

“It would be a tough one to argue that the EUA price rise is purely speculative and not caused by the anticipation of the supply squeeze due to the Market Stability Reserve,” Thomson Reuters carbon analyst Hege Fjellheim said.

“The language in the article is open to different interpretations,” Fjellheim said.

The European Commission declined to elaborate on how the article would work.

One source at the Commission said it welcomed the stronger prices and that conditions to trigger intervention have not been met.

Reporting by Susanna Twidale, additional reporting by Alissa De Carbonnel in Brussels; editing by Jason Neely

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