The clearest sign yet that the carbon market is maturing…


While everyone is talking about EUA prices, it’s the volumes that we should be watching. They give us the clearest sign yet that the carbon market is evolving towards a genuine commodity market.

If we take a look at EUA volumes (thanks to the tireless work of Michael Szabo at ThomsonReuters) you will see that there are some very interesting developments afoot.

First let’s compare total EUA exchange traded volumes for calendar year 2008, with the first trimester of 2008 and with the first trimester of 2009.

EUA volumes - Table 1

First thing to note: in calendar year 2008 about 2.6 billion EUAs were traded on European exchanges. For the first time, this was greater than the underlying carbon asset – which was about 1.9 billion EUAs in 2008.

Second thing to note: we’ve traded almost as many EUAs in the first trimester of 2009 as we did in all of 2008, and more than 3 times the volume that was traded in the first trimester of 2008. This is remarkable growth by any standard.

Now let’s compare the type of contracts that are being traded.

EUA volumes - Table 2

What does this tell us: most notably that there has been a massive increase in spot trades. The volume of spot trades in the first trimester of 2009 are 72 times higher than in the first trimester of 2008 and they are already more than twice the volume that was traded in all twelve months of 2008.

Consequently, there has been a shift in the dynamics of the market, with spot contracts growing in market share and in importance. While the traded futures have continued to grow and continue to dominate the market – representing about 60% of traded volumes in the first trimester of 2009 – the volumes of spot trades are now a significant part of the market, representing 28% of total traded volumes in the first trimester of 2009, compared with just 1% over the first trimester of 2008 and 9% over the full 2008 calendar year.

Now let’s look at who is capturing the lion’s share of these trades.

EUA volumes - Table 3

Evidently, the EXC continues to see its traded volumes grow significantly – up two and half times on the previous first trimester’s volumes. And it continues to dominate the market – with a market share of 71% in the first trimester of 2009.

But more impressive is the growth in traded volumes on the BlueNext Exchange, where first trimester traded volumes in 2009 are already more than double that of the full twelve months of 2008; BlueNext has captured 27% of the total traded market. The majority of these trades are in spot contracts and it is BlueNext’s success that is the reason behind the remarkable growth in spot contract traded volumes.

And because, predictions are a fool’s game, and we are all expert players, if we extrapolate the first trimester 2009 volumes in line with 2008 figures, we could quite reasonably expect total exchange traded volumes of EUAs to exceed 6 billion EUAs. This would be about three times the previous years’ volumes and three times the size of the underlying carbon asset in 2009.

So, what does this signify?

A number of reasons have been put forward to explain this steep increase in volumes, particularly in the spot market. Some observers have spoken about the ‘flight to cash’ phenomenon (liable parties selling allowances to generate cash in response to the deteriorating economic conditions). This was the case at the end of 2008, but it is no longer the case. Other structural factors might also explain the increase, such as the fact that compliance falls at the end of the first trimester so it is often a very active trading period, or the fact that the Italian and Polish registries did not issue their allowances until December 2008 and therefore prior to that date Italian and Polish liable parties had limited access to trading.

However, for me, this increase in volumes is the natural evolution of the market and the clearest sign yet that the carbon market has changed in nature in 2009; that it is maturing from a compliance market into a genuine commodity market.

More liable parties are entering the market, where previously they had been reluctant to do so, or had had little need to do so. And those liable parties that are entering the market are doing so on a more frequent basis. Access to the market is becoming easier and the number of products available to market participants is increasing. The number of registered members on exchanges is growing, particularly in the case of BlueNext, where the last trimester of 2008 and 2009 saw 18 new members join, among them some potentially very large market participants such as Mitsui, Deutsch Bank, Essent Trading, Fortis, EDP and Commerzbank.

The EUA market is now trading at volumes greater than the underlying physical asset. If volumes continue to grow as we cite above, the EUA traded volumes in 2009 will probably be 3 to 4 times the underlying physical asset; a sure sign that the commoditization of the market is underway. Nevertheless, this is still well below other markets, such as power where the traded volume is 10 to 20 times the physical asset, or oil where trading volumes are 30 to 40 times the physical market. Which shows us just how far the market could develop now that it is maturing – with all the advantages and disadvantages that a genuine commodity market entails.


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