European steelmakers are expecting costs from the Emissions Trading System (ETS) to increase. By how much they will increase depends largely on what happens to the price of carbon. However, just as steelmakers have limited experience of the carbon markets, market traders and analysts have little experience of the steel industry. Dialogue between the two sectors could be beneficial to both sides.
SBB 11 April Both the European and global carbon markets could significantly increase costs for EU steelmakers, while at the same time reducing the potential for offsetting those costs, speakers at Steel Business Briefing’s Green Steel Strategies conference in Brussels argued.
European Union Allowance (EUA) prices are expected to rise to around €40/tonne by 2020, according to forecasts presented by Carine Hemery of carbon market analysts Orbeo. Moreover, the amount by which steelmakers can cut their costs by offsetting with UN carbon credits, called Certified Emissions Reductions (CERs), could fall from around €3-4/t currently to just €1-2/t in 2013-2020, she adds.
The December 2011 contract, which has the most liquidity, has consolidated slightly over the last week to €16.97/t on 7 April on the London-based European Climate Exchange (ECX). The December 2011 CER contract also consolidated to €12.97/t.
The carbon markets will have to adjust to a situation in which industrial sectors are buying rather than selling EUAs, says Barclays Capital carbon trader Ben Readman. Utility companies tend to hedge their EUA costs up to three years in advance. However, industrials do not want to sell this far forward, especially as in three years’ time they are also likely to have a shortfall of credits.
Some industries, facing added costs in the next phase of emissions trading in Europe, bemoan political measures designed to increase the cost of carbon credits. However, the two main causes of higher EUA prices so far this year have been the earthquake and ensuing nuclear crisis in Japan and unrest in the Middle East and North Africa.
SBB 1 April European Union Allowance (EUA) prices were steadyat the end of March after seeing the fastest increase since 2008. A combination of high oil and gas prices, together with uncertainty over the future of Europe’s nuclear capacity, has caused a 20% jump in prices so far this year.
The December 2011 EUA contract, which has the highest trading volumes, settled on 30 March at €17.05/t ($24.24/t) on the London-based European Climate Exchange (ECX).
The market has been waiting for the release of 2010 emissions figures today before deciding on a direction, Carine Hemery of carbon market analysts, Orbeo, tells Steel Business Briefing. If the total is higher than the 1.95bn t of CO2e Orbeo has forecast then this could push prices higher, she suggests.
The future of Europe’s nuclear power plants will also have an effect on prices, Hemery adds. If German chancellor, Angela Merkel, decides to permanently close the country’s seven oldest nuclear reactors, EUA prices are likely to see another jump, she explains.
The European Emissions Trading System has often been at the centre of controversy. However, in spite of the uncertainty surrounding the market, prices have remained stable and even risen. This may suggest the market is more resilient than many assume.
SBB 27 January Europe’s carbon credit spot markets remained closed for business yesterday as national carbon registries remained unable to transfer credits. Furthermore, the most troubled registries could remain closed for far longer than expected. OTE, the company responsible for the Czech registry, has told Steel business Briefing that re-opening could be ‘a matter of weeks’ rather than days.
The theft of 450,000 European Union Allowance (EUA) carbon credits from the Czech registry and a hacking attack on the Austrian registry led the European Commission to block transfers of carbon credits until at least 26 January, as previously reported.
The registries hold the carbon credit accounts of participants in the Emissions Trading System (ETS). EUAs can be used to account for greenhouse gas emissions equivalent to one tonne of carbon dioxide each by European industrials in the ETS. It does not appear that steelmakers’ EUAs have been taken.
Registries will now remain closed until an independent assessment of security has been carried out on a country-by-country basis and this has been verified, the European Commission says. However, registries which have been affected by theft must also prepare a full report, which will delay re-opening even further.
The carbon market is unlikely to be strongly affected, analysts tell SBB. Spot trade can be as little as 5% of an exchange’s trading volumes, says Trevor Sikorsky, head carbon analyst at Barclays Capital. “It is a big blow to the image of the market…but it does not change the fundamentals,” Emmanuel Fages of carbon market analysts Orbeo adds. March 2011 EUA futures were settled at €14.69/t ($20.13/t) on 26 January on the London-based European Climate Exchange, up some €0.50 from a week earlier.
Russia is expected to become a significant new source of offset credits in the coming years. After several years of delays it began approving projects to earn ERUs last year.
SBB 21 January Four Russian steel producers are among the 18 projects recently approved by the Russian Ministry for Economic Development to earn carbon credits from the Joint Implementation (JI) programme, Steel Business Briefing learns.
Once approved, the projects are now eligible to receive Emissions Reduction Units (ERUs) which can be sold or traded on an exchange. For a reduction in greenhouse gas emissions equivalent to one tonne of carbon dioxide the project would receive one ERU with a current market value of €11.1/t ($14.93/t) on London’s European Climate Exchange. ERUs can be bought by European industrial facilities and used to meet their obligations under the Emissions trading System.
The four steel projects are all in the five biggest projects on the list and together could earn up to 13.7m ERUs. By far the largest was MMK’s 2004-2006 project to replace its open hearth furnaces with EAFs, which the company expects to save 7m t of CO2 emissions and therefore earn 7m ERUs.
NLMK, TMK and Asha Iron & Steel have also had projects approved and could earn 2-2.5m credits each.
This is the second group of Russian JI projects to be approved so far. JI is a mechanism under the UN Framework Convention on Climate Change by which investors in Annex I countries, including Russia and Ukraine, can earn carbon credits by investing in reducing greenhouse gas emissions.
Amurmetal, Chelpipe Kosaya-Gora Steelworks and Air Liquide-Severstal had also entered projects, but these did not receive approval this time around.