Weekly Carbon Trading Market Update – 6th July, 2015

Market Development

• Price volatility on the back of Grexit developments • Market low of €7.25 • Greece votes ‘no' to rejecting further austerity, Euro weakens • EU Plenary vote for MSR on Wednesday Auction Overview • 15.075Mt comes to market in 5 auctions of EUAs

Price Action

The EUA market started the week below the previous Friday's close on the back of the Greek government's rejection of the terms of an international bailout offer, seeing EUAs slipping to a low €7.25 of last Monday. Price recovered a little during the week but after Monday's price volatility the market reaction to the news was subdued. Sideways drift, albeit in a slightly lower range, continued and volumes were subdued. Sunday's referendum convincingly rejecting the EU's bailout package has resulted in further small losses this morning but a failure to match Monday's low. The Euro continues to weaken as investors switch to safer currencies and this is likely to be the largest impact on European carbon pricing as Greece accounts for less than 2 percent of the euro zone's output and the biggest impact will be from the rest of Europe's productivity being negatively affected (Energy Aspects estimate that for every 1% decline in industrial output and electricity demand results in a 28Mt carbon reduction - see their June 2015 Outlook "Greece is the word"). It will take up to 2 weeks before more clarity on Greece is established in the build-up to the ECB bond repayment due on 20th July. More sideways drifting is likely until there is a decision and it seems that, based on early carbon emissions trading on Monday, the increased chance of a Greek exit from the Euro has already been priced into the market.

The EU Plenary meeting to vote on the adoption of the law establishing and operating the MSR, scheduled for today, was pushed back until Wednesday. Although the adoption is widely expected, approval by lawmakers would support EUAs as the market likes certainty. Price impact: The world watches and waits if Greece withdraws from the Euro. Remember that the Grexit is an issue about monetary union and not about membership in the EU. It appears that the Greek default might already be priced in and has no major effect on EUAs. Potential for small price rise on MSR approval on Wednesday.

Germany decides against additional carbon trading levy

The German government has decided against a plan to force older coal fueled power plants to purchase extra EUA allowances in a push to meet the country's 2020 emission reduction targets. Under the original plan coal plants older than 20 years old would have faced strict regulations on their efficiency with the penalty for exceeding these targets being calculated in Euros and then levied in EUAs (whereby the number of EUAs required to be submitted would be the amount of the Euro penalty divided by the EUA market price at the time). Read more in our blog article here.

European Court of auditors

The European Court of Auditors published a report last week citing shortcomings with the EU ETS. These included market regulation, oversight and insufficient checks for new account openings which makes the system vulnerable to allowance theft or tax fraud. Improvements have been introduced but further progress needs to be made to overcome these shortcomings in order to protect the integrity of the EU ETS. Future developments for market supervision, transaction monitoring and verification stand a good chance of achieving most of the requirements.

Intended Nationally Determined Contributions (INDCs)

INDCs were published last week on the United Nations' climate website. Countries submitted their plans for outright cuts in greenhouse gas emissions compared to business-as-usual scenarios. This represents a small, but significant, step towards a global greenhouse gas agreement. National pledges are expected to be submitted by October 1st, well ahead of COP21 in Paris in December where plans will be reviewed and decided.

Market Stability Reserve (MSR)

• 8th July - plenary vote (moved from 6th July) • 13th/14th July - potential date for a (rubber stamp) vote of the European Council, the final

MSR hurdle.

The week ahead

Lots going on but nothing to give definitive price direction for EU carbon. An eye on FX and another on other countries looking to renegotiate their way out of austerity measures will help determine where we are headed next.