ITL-CITL and Allocations Update

Spot Trading in the EU ETS is very much dependent on the availability of EUAs and the functionality of and trust in the registries. Therefore, the role of Spot trading was quite insignificant during the first months of 2nd phase trading activities. This might change throughout the end of 2008.

In our June newsletter, we pondered, if the connection between ITL and CITL would be functional in 2008. Since then, countries allocated their EUAs every now and then, and no shadow AAUs were transferred into their Member State’s account at the ITL. At the start of October, only nine countries issued 2008 EUAs, accounting for about only 25% of the total number of EUAs to be issued this year. Countries as Germany, Sweden and UK stated they will only allocate if the connection is functional. Also Germany´s NAP table for phase II was not approved by the EU Commission until mid October, which made it impossible for Germany to allocate before the connection was in place.

Although exchanges like Climex offered cleared EUA and CER spot contracts, from the very beginning of the 2nd phase, the limited issuance resulted in low liquidity on the spot market and a shift towards the forward market.

On 17 October 2008, the connection between ITL and CITL was finally in place and the member states were able to allocate EUAs to the installations. EUA issuance remains a hot topic on the market however. As per 31 October 2008 the UK and Ireland completed their distribution of 2008 EUAs but countries such as Germany, Italy, the Netherlands and Poland have not yet done so. These delays mean that the EU-ETS market approaches its first delivery deadline with a potential shortage of allowances.

The ITL-CITL connection now allows more dynamic activity on the CER spot market and allocations should stimulate spot trading in EUAs. This is especially good news for smaller and medium sized firms within the EU ETS, for whom the requirements for forward trading are rather restrictive. As soon as issuance takes place it is finally possible to actively participate, which in turn will help increase liquidity and efficiency of the spot market, which suffered the last months from the non-allocation of many member states.