High CO2 prices and volumes: is there more than meets the eye?

When we look at the snapshot of the carbon market, we see nice CO2 prices (see below) and volumes (63Mton in January!), floating on the winter temperatures and gas prices. A technical graph would show March prices above the historic €30 values. But there is more than meets the eye. The carbon market is not only a compliance market. The reported high volumes -more than 2 Mton/day- come from speculation and day trading: volatility and intra-day spreads gives that opportunity. But the fun seems over in 2008. Lower 2008 and 2010 futures prices, absent forward curve, uncertainty of the flow of CERs and ERUs and Russian and Ukrain AAUs and the knowledge that large CO2 reduction projects with a price below €10/ton are profitable strengthens doubts about future carbon prices and a longer term forward curve. Most traders are expecting a narrow crunch window in May 2008, because companies that are short by then will have problem to find enough EUAs in time at reasonable price. Hence, 2005-2007 EUAs lose their validity in 2008.