UPDATED: EU CO2 Jumps to Record as Market Comes Away Unscathed; Brexit Otherwise Takes Toll (4)

By Mathew Carr

Jan. 7-8, 2021 — LONDON: The market for European Union carbon allowances jumped to record after so far coming away largely unscathed by Brexit.

The volume of open interest, a measure of trading positions that have not closed, has grown from the end of 2019, according to data from ICE Futures Europe, the main exchange for emissions trading.

Here are futures and options positions opened but not closed, measured by the number of contracts for the past five years:

Note the Dec. future is the most commonly traded, so interest drops each year from end of Nov. to end of Dec. as the future gets delivered.

Here’s an even prettier way to look at the market’s open interest over time from freelance reporter Alessandro Vitelli (@CarbonReporter):

Sent by email

Increased interest reflected higher inventory as the EU is increasingly selling allowances at auction rather than giving them away directly to emitters, said one trader. See this from the European Commission website (undated):

https://ec.europa.eu/clima/policies/ets/auctioning_en#tab-0-2

There have not been big shifts in carbon trading venues after Brexit, according to another trader.

EEX, an exchange for power, gas and carbon trading in Germany, has also seen its open interest advance year on year, but it’s still much smaller than ICE in emissions trading. Read: https://carrzee.org/2021/01/08/eexs-open-positions-in-eu-carbon-futures-advance-y-y-amid-brexit/

The EU carbon future for the Dec. 2021 has enjoyed a string of record-high levels this week, rising above 35 euros for the first time on Friday, before easing back.

See this:

The jump is seen as more bad news for European coal (Tweet from Thursday):

And the bullishness is mostly seen continuing this year:

ICE is gearing up to host trading in new U.K. carbon allowances later this year after Britain left the EU program, the world’s biggest by traded volume. The U.K. plans to start its own market and may link back into the EU system or with other nations.

Brexit makes the rising interest in the EU market even more remarkable.

See this: https://carrzee.org/2020/12/17/ice-to-auction-carbon-allowances-for-u-k-after-brexit/

Democrats will now have full control of the U.S. government after Jan. 20, meaning bets are on for the country to implement its own carbon market during the next few years, or seek to link up state-based programs and make them more cost efficient.

See this credible voice: https://carrzee.org/2021/01/07/gloves-are-off-in-the-climate-fight-after-democrats-win-control-of-the-u-s-senate/

China will start its own national carbon market this year.

The sales of British carbon allowances would start by the middle of this year and ICE would offer futures in the same time frame, giving British emitters some idea of when they’ll be able to manage the risks of their exposure to the program.

See also this:
https://carrzee.org/2020/12/25/u-k-eu-disputes-on-climate-to-be-governed-by-bespoke-panel-of-experts-after-brexit/

NOTES:

The U.K. has been granted temporary equivalence with EU rules until June 2022 on clearing of derivatives, but it has lost share-trading business as some buyers and sellers now need to use venues in the EU rather than in London.

Britain and the EU have agreed to draft a deal around the regulation of financial markets by March, an agreement that will supplement the broader Christmas Eve trade pact, but which won’t be as legally binding, according to Bloomberg News.

(Updates with Friday’s record levels. Earlier version corrected to say middle of THIS year for U.K. carbon contracts. Fixes dateline. Apologies for the confusion; adds EEX)

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