Spot exchanges face tough year after late Phase II

Spot exchanges are preparing for a tough financial year following the continued delays in issuing European Union Allowances (EUAs) for Phase II of the trading scheme. With Phase I expired, only four countries out of 27 have allocated the new batch of allowances. “We and other spot exchanges made all the investments to be ready for trading, both CERs and Phase II EUAs, but we don’t have the income. This means we have pre-financed everything, without being able to recover our investments,” Sascha Bloemhoff, commercial director of spot exchange Climex said.

So far, no industry association or exchanges have launched any legal appeal against the late arrival of allowances, which eats into the profits of spot exchanges and limits the trading opportunities of smaller installations, which don’t have the necessary backing for trading riskier forwards markets. Bloemhoff said it would probably have little impact if an exchange, such as Climex, launched an appeal against the delays. An approach would have to come from industry, but uniting smaller installations from different sectors might be a hard to achieve.

Climex is now heavily critical of the way the European Commission (EC) has handled the start of Phase II. “I don’t know if the EC understands what needs to be done for a market to work. The fact that there is no clarity or deadline given for when Phase II allowances will be issued, when there will be a link-up to the ITL and if and how many CERs will be allowed post-2012 creates a huge amount of uncertainty and therefore risk in the market. This reduces the incentive for investors [to become active in the carbon market],”Bloemhoff said.

A spokeswoman for the EC’s environment directorate blamed the non-issuance of allowances on member states that were late in sending in the National Allocation Plans, but said there were immediate plans to introduce fines on countries that missed deadlines. “We are in talks with the member states during the minister councils in order to evaluate a next step, if that proves necessary,” she said.

Liquidity has been extremely limited so far, as only around 10% the total amount of allowances have arrived to the national registries. Buyers from all over Europe are competing for these. “I expect liquidity will pick up to a certain extent once all the allowances haven been issued. But this has hurt the market,” Bloemhoff said, adding: “Participants were lined up and ready to trade and now the momentum has gone.”

Reprinted with permission of Heren from the 28 April European Daily Carbon Markets