Unicredit advocates EU ETS-CER credit swapping
London, 30 October (Argus) — Companies in the EU emissions trading scheme (ETS) should swap allowances for certified emission reduction (CER) units after the spread between the two widened to a record level, Italy-based bank Unicredit said.
The spread is likely to narrow in the coming weeks as a result of higher allowance auctioning volumes, Unicredit said. “We therefore recommend participants in the EU ETS to realise swapping activities within their allowed quota at current levels,” Unicredit said, noting that the swap is “highly attractive”. The December 2012 EU ETS allowance-CER spread closed at €7.09/t CO2 equivalent (CO2e) yesterday.
Current CER price levels do not leave much room for a widening of the spread, the analysts added. The CER benchmark contract hit a record low of €0.84/t CO2e on 24 October. News that the European Commission is proposing to ban emission reduction units (ERUs) issued after 2020 from countries that do not sign up to an international agreement on emissions targets has put ERU and CERs under strong pressure, in addition to a heavy issuance schedule.
Healthy clean dark spreads have strengthened allowance demand from power utilities in recent weeks, Unicredit said. This, coupled with the delay in early phase 3 (2013-20) EU ETS auctions, has supported the allowance market and contributed to the widening spread. But the risks to the downside in the allowance market remain high, the bank noted. The early auction volumes will weigh on prices when they come to market.
Uncertainty about possible further restrictions on CERs and ERUs will probably lead most installation operators to use as many external credits as the quota allows by 30 April 2013 for this compliance year, the bank added. The use of a higher amount of CERs and ERUs for compliance dampens demand for allowances, and adds more downside pressure to allowance prices.
“Due to our bearish EUA price forecast, we rather expect the EUA-CER spread to narrow again,” Unicredit said.
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