Tendances Carbone

The Monthly Bulletin on the European Carbon Market

A newsletter of CDC Climat Research in partnership with
June 2011 N59

and

2010 compliance: weak recovery and high credit use

In 2010, growth returned to the sectors covered by the EU ETS thanks to the economic recovery. These sectors production grew by 2.4% on average, after falls of 4.4% in 2009 and 9.4% in 2008. The growth of business led to a rise in emissions. Like for like, verified emissions in the EU ETS sectors rose by 2.5% in 2010, from 1,869 MtCO2 in 2009 to 1,915 MtCO2. While the economic crisis led to an overall surplus of allowance allocations in 2009 of 88 Mt CO2, this dropped in 2010 to 55 MtC02 excluding auctioned amounts. Emission increases were highly variable. In the combustion sector they rose by 1.7%. The metal-working industries saw their emissions soar by about 20%, but these were still below 2008 levels. Emissions from oil refining, cement and ceramic products were slightly down. But the most noteworthy item in the 2010 data was the considerable increase in the use of carbon credits coming from the Kyoto flexible mechanisms. The quantity of credits used, around 85 Mt in 2008 and 2009, rose by 60% in 2010 to nearly 140 Mt, i.e. 7% of the units surrendered in 2010. This increase in the amount of credits used went hand in hand with an increase in their frequency of use: the percentage of installations using at least one credit rose from around 15% in 2008 and 2009 to over 25% in 2010. The data reveal a greater use of credits in the new Member States, particularly Slovakia, Romania and Hungary, where the rate of use (credits refunded/annualised utilisation limit) exceeded 50% over the three years. In other Members states, their use was not negligible, however. Countries like Spain, Portugal, Finland and Germany had average rates of use of over 30%. In terms of sectors, the highest rates of use were found in paper, combustion and ceramics. In the two latter sectors, the rate increased considerably in 2010, to 60%. Lastly, the size of installations seemed to play a role in terms of frequency (only 15% of installations emitting less than 25 ktCO2/year used credits, compared with over 30% of installations emitting more than 500 ktCO2/year), but had little effect in terms intensity of use. The increase observed in 2010 is evidence of a current preference on the part of operators, which want to be sure that they can achieve compliance through units whose conditions of use remain uncertain in the medium term. The prohibition of HFC23 and adipic N2O credits from 2013, as these represent 71% of the credits issued, has generated two types of reaction: an incitement to use as many credits as possible before they expire, and the perception of an increased risk linked to the rules that will govern the use of credits in future. The difference in price between EUAs and credits, which is an indicator of this risk as perceived by the market, has risen by 85% over the past few months (2/t in May 2010 compared with 3.7/t in May 2011) and has also helped to speed up the use of credits. The low growth in emissions and the extensive use of carbon credits has thus resulted in a seemingly comfortable margin between allocated EUAs and expected emissions for phase 2. But everything is relative: firstly because operators anticipations go beyond 2012 and the reduction objective associated with phase 3 is more ambitious, and secondly because a number of uncertainties remain (questions about nuclear power, the rules for using credits, a possible move to a 30% reduction scenario). Lastly, the nature and the quantity of credits generated in the medium term are difficult to predict accurately. To date, around half the CERs and ERUs issued have already been surrendered in the EU ETS. Raphal Trotignon - Climate Economics Chair raphael.trotignon@chaireeconomieduclimat.org Nicolas Stephan - CDC Climat Research nicolas.stephan@cdcclimat.com

Key points
1) Brent price fall, concerns about European economic activity and the announcement of the coming sale of 300 Mt CO2 (NER 300) by the EIB led to a price drop of the EUA. 2) However, the confirmation on May 30th of Germanys withdrawal from nuclear power by 2022 at the latest made the price of the EUA go up again. 3) On May 17th, the European Commission confirmed that only 2% of installations had not surrendered their quotas by April 30th 2011. 4) In May, the share of EUA trades on OTC dropped (7 pts) against a rise in carbon exchanges (+7 pts), with a level of 30% and 70% respectively. Volumes up for the month: EUA +14%, CER +39% and ERU +332%
Mt CO2
600 500 400 300 200 100 0

May 10

Jun 10

Jul 10

Aug 10

Sep 10

Oct 10

Nov 10

Dec 10

Jan 11

Feb 11

Mar 11

Apr 11

May 11

Monthly EUA volume (Spot & futures, exchanges & OTC) Monthly CER volume (Spot & futures, exchanges & OTC)

Sources: ICE, BlueNext, EEX, NordPool.

Monthly fall for Dec.11: EUA 1% at 16.78 and CER 2.3% at 12.74 on average
20 18 16 14 12 10

May Jun 10 10
Source: ICE

Jul 10

Aug 10

Sep 10

Oct 10

Nov 10

Dec 10

Jan 11

Feb 11

Mar 11

Apr 11

May 11

ICE-EUA Dec. 11

ICE-CER Dec. 11

ICE-EUA Dec. 13

ICE-CER Dec. 13

EUA-CER Spread: Dec.11 +3% at 4.0 and Dec.13 +1.8% to 5.0 on average
5,5 5 4,5 4 3,5 3 2,5 2 1,5

May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May 10 10 10 10 10 10 10 10 11 11 11 11 11
Spread EUA-CER Dec.11 Spread EUA-CER Dec.13

Source: ICE

Energy
Primary energy prices and electricity prices
May 2011 Coal Natural gas Crude oil API # 2 CIF ARA (First month in USD/t) NBP (spot in /MWh) TTF (spot in /MWh) Brent (First month in USD/b) Germany (/MWh) Electricity United Kingdom (/MWh) Spot Calendar Spot Next summer Next winter 124.0 22.3 23.0 Germany United Kingdom (* summer 2012)
Sources: CDC Climat Research, Thomson Reuters

Clean dark, clean spark spreads and switching price

Clean spark (/MWh) spot cal.12 8.1 11.2 0.1 *4.5 Clean dark (/MWh) spot cal.12 14.9 18.5 11.5 *14.3 Switching Price (/tCO2) spot cal.12 20.9 24.3 25.9 *23.8
Sources: CDC Climat Research, Thomson Reuters Source: CDC Climat Research from Eurostat data

114.6 60.2 59.0 56.7 66.0 61.9

Allemagne - Moyenne mensuelle des Clean dark et spark spreads des contrats spot en base
/MWh 16 14 12 10 8 6 4 2 0 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Clean spark spread Clean dark spread

= =

The Brent North Sea price registered a monthly fall of 7%, oscillating between 109.1 and 125.0 USD/b, following the fall of the dollar against the euro, due to disappointing American economic indicators. The Brent price could continue to drop, given the political situation in Yemen, the deterioration of Greeces debt and growing pessimism regarding the macroeconomic situation in Europe. The price of TTF natural gas for delivery in 2012, API#2 coal and electricity for delivery in 2012 remained virtually stable in Europe in May, while the official announcement of the definitive closure of eight nuclear reactors already shut down in Germany should in the long-term maintain demand for and thus the price of fossil fuels until 2012. In the UK, the 2% fall in the price of electricity contracts for delivery in the summer of 2012 led to a drop in clean dark and sparks of 1.4% and that of the CO2 switch price coal/gas of 1.7% to total 23.8/t. In the German electricity spot market, the rise of 11% on average in the price of electricity considerably increased the margins of coal (+82%) and gas power stations (+205%), with a slightly lower price for coal/gas changeover CO2 (1,1%) at 23/t.

Production
Electricity production (TWh)
EU 20 (in TWh) Production of which - Combustible fuels - Nuclear - Hydro - Geoth./Wind/Solar/Other
* Gas, coal, oil. Source: CDC Climat Research, from IEA data
350 300 250 200 150 100 50 0 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11

Production indices (indice, base year, 2005)

Since Jan.11 581.5 293.5 167.5 83.4 37.0 Past year (% change) 2.2% 8.2% 7.8% 9.2% 34.3% EU 27 Indust. Prod (excl. construction) EU ETS sectors production* Electricity, gas and heating Cement Metallurgy Oil renery Mar. 11 103.5 93.8 98.2 68.6 96.0 87.4 Last month Year-on-Year (%) (%) 0.5% 0.8% 0.2% 5.5% 1.5% 3.9% 3.2% 0.9% 1.0% 3.0% 3.9% 5.6%

Feb. 11 277.0 139.3 78.9 39.0 19.6

* Index weighted by EU ETS sectorss weight in average total allocation over 2008-2012
114 108 Index, Base Year 2005 102 96 90 84 78 72 66 60 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Cement (EU 27) EU ETS sectors (EU 27)

TWh

Industrial Production (EU 27)

Combustible fuels Hydro

Nuclear Geoth./Wind/Solar/Other

In February 2011, Europes electricity production came to 277 TWh, down by 1.3% compared with 2010. Total production since January 2011 indicates that 60% of electricity was produced using fossil sources down nearly 2 points compared with the same period in 2010. However, the proportion of renewable energies not including hydraulic energy represented 6.4% of the entire total for Jan-February 2011, i.e. 37 TWh, up by 0.9 points compared with the same period in 2010. The share of electricity from hydraulic sources, which totalled 4.1% of the European mix, was down by 0.8%, however. In March 2011, our production index for the EU ETS sectors registered a monthly fall of 0.8%, higher than that of 0.5% for the rest of the economy. The monthly variation indicates that the cement production sector (5.5%) and ceramic products sector (5.2%) were those registering the biggest fall. In May 2011, the manufacturers confidence index came to 3.5 points, down for the first time since March 2009.

Temperature impact
European temperature index (C)
Average of the MetNext Weather indices for 18 European countries, weighted according to the emission allowances allocated to each country.
Apr. 11 Monthly average (C) Monthly average (C) 2000-2009 Monthly minimum (C) Monthly maximum (C)
Temperature ( C) 22 20 18 16 14 12 10 8 6 4 2 0 -2 Historical european temperature 2000-2009
Source: Metnext Weather

Temperature impact on electricity generation factor (%)

The impact factor, which is calculated on the basis of a statistical electricity generation model, expresses the temperature impact in relation to average weather patterns for the 10 years between 2000 and 2009.
Apr. 11 EU 27
Temperature impact on electricity generation factor (%) 8 EU27 6 4 2

May. 11 14.6 14.7 9.2 16.5

12.4 10.6 8.4 12.6

May. 11 1%

5%

Monthly european temperature index

2 4 6

May 10

Jun 10

Jul 10

Aug 10

Sep 10

Oct 10

Nov 10

Dec 10

Jan 11

Feb 11

Mar 11

Apr 11

May 11

May 10

Jun 10

Jul 10

Aug 10

Sep 10

Oct 10

Nov 10

Dec 10

Jan 11

Feb 11

Mar 11

Apr 11

May 11

In May, our EU ETS temperature index reached 14.6C with a negative difference of 0.2C compared with its decennial average. Most European countries rediscovered their normal seasonal averages apart from Spain, which showed an index down by 3.3C compared with its temperatures of the past ten years. However, the monthly indexes of Portugal and France registered a positive difference compared with their decennial average, of 1.8C and 1.0C respectively. Our weather-sensitivity factor indicates that in May, temperatures had the overall effect of increasing European electricity production by 1%. On the other hand, with some large emission-producers, particularly Germany and France, electricity production fell by 4% and 3% respectively compared with normal temperature conditions. While the effect of these temperatures was to increase electricity production, the rainfall observed in May improved the level of hydraulic reservoirs in the Northern Europe region and Spain, with a monthly filling rate up by 4.6 points and 2.6 points respectively on their decennial trends. In France, the deficit in rainfall contributed to the low level in reservoirs and created a number of concerns on the proper cooling of several nuclear power stations.

Institutional environment
EUA supply
2008 Allowances allocated (kt) Combustion installation Cement clinker Iron and steel Mineral oil reneries Pulp, paper and board Glass Other activities Coke ovens Metal ore Ceramic products Allowances auctioned (Mt) 1,950,156 1,254,227 209,805 184,454 153,205 37,803 24,864 22,531 21,928 18,215 23,122 44.00 2009 1,967,787 1,265,113 212,571 184,786 153,850 38,740 25,238 22,508 21,982 18,640 24,360 72.00 2010 1,984,219 1,278,989 214,147 184,213 156,964 39,332 25,246 22,845 21,978 18,660 21,845 85.63
Sources: CITL, UK Debt Management Ofce, EEX

CER and ERU supply

May 11 Number of CDM projects of which - registered with - CER issued Cumulative volume of CER issued (Mt) CER available until May 2013 CDC Climat Research estimate (Mt) Number of JI projects of which - registered Cumulative volume of ERU issued (Mt) via - Track 1 via - track 2 7,611 3,145 1,057 624 Last month change +153 +111 +23 +19
Sources: CDC Climat Research, UNEP Risoe

1,150

+20

478 266 36.9 28.3 8.6

+9 +9 +0.5 +0.4 +0.1

On 5 May, the European Commission published draft amendments to its registries regulation with an objective to respond to security concerns and the move to a centralised registry. This regulation will be voted on at the next Climate Change Committee in mid-June and has to be adopted by the European Parliament and Council. Therefore, it could come into force in September at the earliest. The European Commission has announced that it will sell the NER 300 by 2012, together with 120 million additional quotas in phase III by 2013. Furthermore, six Member States (Denmark, Austria, Belgium, Estonia, Germany and Greece) have agreed to prohibit the use of credits from HFC and N2O industrial projects for the non-ETS sector. In line with the recommendations of the UK Climate Change Committee, the British government has made further commitments by approving on 17 May the reduction of its GHG emissions by 50% compared with 1990 between now and 2025, i.e. a 37% reduction in emissions by 2020. According to a resolution voted on 24 May by the European Parliament Environmental Commission, the EU must make a commitment by the end of 2011 to reduce its GHG emissions by 30% between now and 2020.

Source: Metnext Weather

Carbon markets dashboard

Primary market - EUA auctions (MtCO2)
Countries United Kingdom Price (/t) Volume (Mt) Price (/t) Germany Volume (Mt) Others Price (/t) Volume (Mt) Spot Futures Spot Futures May-10 Jun-10 15.6 4.4 15.17 15.27 15.52 15.42 1.2 1.5 2.28 2.85 Jul-10 14.65 4.4 14.17 14.01 1.2 2.28 Aug-10 Sep-10 15.58 4.4 14.57 15.14 14.57 15.4 1.5 1.2 2.28 2.28 Oct-10 15.46 4.4 15.28 15.33 1.2 2.28 14.9 2 Nov-10 Dec-10 Jan-11 14.51 14 4.4 4.4 14.63 14.14 14.51 4.35 1.2 2.28 14.75 2.2 Feb-11 Mar-11 14.36 15.59 4.4 4.4 14.66 15.92 14.87 16.54 1.2 1.5 2.28 2.85 Apr-11 May-11

16.45 16.92 1.20 2.28

16.62 16.69 1.50 2.28

Sources: UK Debt Management Ofce, EEX

Primary market - CER and ERU issued (MtCO2)

May-10 Jun-10 Cumulative volume of CER issued UNEP-Risoe (Mt) CER available until May 2013 CDC Climat Research estimate (Mt) Track 1 (Mt) Cumulative volume of ERU issued (Mt) Track 2 (Mt) 418 1,200 5.5 1.8 421 1,200 6.1 3.6 Jul-10 424 1,250 6.1 3.6 Aug-10 Sep-10 430 1,200 6.1 3.7 439 1,175 6.5 4.2 Oct-10 450 1,175 16.6 4.2 Nov-10 Dec-10 Jan-11 475 1,130 16.6 4.2 496 1,125 16.6 4.2 546 1,100 24.1 4.7 Feb-11 Mar-11 553 1,115 24.9 4.7 576 1,125 26.8 8.3 Apr-11 May-11 605 1,130 27.9 8.5 624 1,150 28.3 8.6

Sources: UNEP-Risoe, CDC Climat Research

Secondary market - Prices (/t) and volumes: EUA, CER, ERU (ktCO2)
Price EUA Volume EUA Price CER Spot market Volume CER (BlueNext) Spread EUA-CER Price ERU Volume ERU Price EUA Volume EUA Price CER Dec.11 Volume CER Spread EUA-CER Price ERU Volume ERU Price EUA Volume EUA Futures Price CER Markets (ICE) Dec.12 Volume CER Spread EUA-CER Price ERU Volume ERU Price EUA Volume EUA Dec.13 Price CER Volume CER Spread EUA-CER May-10 Jun-10 15.3 15.32 24,671 23,344 13.22 12.95 2,574 4,476 1.45 2.07 Jul-10 Aug-10 Sep-10 14.21 14.62 15.31 13,769 10,404 12,928 12.2 12.68 13.71 3,562 4,097 3,032 2.36 2.01 1.93 Oct-10 15.1 11,816 13.39 1,362 1.6 Nov-10 Dec-10 14.76 14.22 18,875 8,001 12.3 11.75 3,988 5,185 1.86 2.46 11.77 1,129 15.08 14.62 77,440 105,774 11.83 11.39 28,167 20,944 3.24 3.23 11.66 11.29 150 1,085 15.56 15.06 66,596 46,144 11.55 11.15 35,979 23,244 4.01 3.9 11.38 11.05 0 300 16.61 16.07 9,437 14,088 Jan-11 14.13 1,603 11.38 4,633 2.75 11.35 115 14.54 190,681 11.12 23,133 3.41 11.05 556 14.98 67,444 10.99 39,993 3.98 10.91 436 15.96 18,143 11.87 685 4.09 Feb-11 14.56 884 11.57 5,117 2.97 11.51 141 14.98 208,412 11.50 27,516 3.47 11.39 70 15.53 69,670 11.30 25,014 4.23 11.20 50 16.50 26,090 12.20 1,580 4.29 Mar-11 15.66 7,298 12.51 3,127 3.15 12.46 235 16.49 398,313 12.47 52,102 4.02 12.46 1,002 17.17 123,705 12.33 48,272 4.83 12.23 370 18.36 35,657 13.61 2,297 4.74 Apr-11 16.27 5,464 13.08 2,950 3.19 13.04 330 16.96 201,118 13.03 31,325 3.92 12.93 0 17.8 70,472 12.87 15,872 4.93 12.77 0 19.13 34,401 14.22 1,324 4.91 May-11 16.5 2,538 12.75 1,483 3.74 12.66 0 16.78 227,804 12.74 33,150 4.05 12.64 552 17.56 75,281 12.67 24,143 4.89 12.57 525 18.88 34,612 13.87 5,790 5.00

15.9 58,667 12.81 16,944 3.09

15.83 58,607 12.66 21,177 3.17

14.7 47,593 11.92 16,709 2.78

14.99 32,970 12.28 20,621 2.7

15.69 43,235 13.06 18,100 2.63

15.64 54,446 12.88 18,744 2.75

16.57 57,720 12.58 27,567 3.98

16.41 61,990 12.71 35,217 3.7

15.25 61,694 11.92 19,887 3.32

15.5 39,749 12.23 21,209 3.27

16.16 35,618 12.92 15,586 3.24

16.12 47,238 12.70 22,602 3.42

17.66 10,529

17.44 7,390

16.34 6,291

16.61 3,495

17.33 4,816

17.31 16,654

Sources: BlueNext, ICE

Emission-to-cap by EU ETS sector and country: difference between distributed allocations of allowances and verified emissions
Combustion Cement clinker Iron and steel Mineral oil reneries Pulp, paper and board Glass Other activities Coke ovens Metal ore Ceramic products Total (t)

2008 253,550,053 20,182,819 51,597,174 1,831,556 6,559,985 2,328,312 1,542,298 4,264,021 4,931,225 273,567 163,702,208

2009 113,953,229 59,906,658 90,456,616 7,400,996 10,878,883 5,898,098 6,750,301 10,949,370 9,583,215 4,300,969 92,171,877

2010 127,220,592 62,985,897 70,376,100 13,486,862 9,424,977 5,311,627 2,904,448 8,912,954 9,678,352 125,808 55,986,433

Source: CITL

CDC Climat Research is the research department of CDC Climat, a subsidiary of the Caisse des Dpts dedicated to the ght against climate change. CDC Climat Research provides public research on the economics of climate change. The herein opinion and analysis bind neither BlueNext S.A. nor Metnext S.A ISSN: 1953- 0439

CDC Climat Research Publication manager: Benot Leguet Editor in Chief: Nicolas Stephan, Tel : + 33 1 58 50 77 72 nicolas.stephan@cdcclimat.com 47, rue de la Victoire - 75009 Paris

Source: CITL

Germany United Kingdom Italia Poland Spain France Czech Republic The Netherlands Romania Others Total (t)

2008 84,222,673 52,601,823 9,116,362 3,139,504 9,919,501 5,880,211 5,116,459 6,278,816 7,689,008 17,109,207 163,702,208

2009 37,074,525 17,273,131 24,502,770 10,799,547 13,516,237 18,592,403 13,282,127 2,755,940 24,829,146 38,241,363 92,171,877

2010 53,462,742 16,955,792 10,910,263 5,481,031 28,641,386 16,050,484 12,192,415 480,287 27,310,537 25,338,564 55,986,433