16

7

98

12

1011

131415

€ /t

on o

f CO2

Sep09

Oct09

Nov09

Dec09

Aug09

Jul09

Jun09

May09

Apr09

Mar09

Feb09

Feb10

Jan09

Jan10

CER Price Dec 10 11.32€

Futures Price Dec 10 - ECX CER Price Dec 10 - Reuters

EUA Price Dec 10 12.86€

Carbon prices:Fluctuated in a narrow range before the distribution of 2010 allowances.Source: ECX, Reuters

1€

4€

3€

2€

0€

EUA-CER Price Spread

Sep09

Aug09

Jul09

Jun09

May09

Apr09

Mar09

Feb09

Feb10

Jan09

Jan10

Nov09

Dec09

Oct09

EUA – CER price spreads:Bounced back towards their 12-month average.Source: ECX, Reuters

0

200160120

8040

280240

360400

480520

440

320

Nov09

Dec09

Jan09

Jan10

Feb09

Mar09

Apr09

May09

Jun09

Jul09

Aug 09

Sep09

Oct09

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

Mt C

O2

Monthly volumes:Returned to normal for EUAs while continued to decline for CERs. Source: ECX, LEBA, Noodpool, PointCarbon

Ed

ito

ria

lTendances Carbone

T h e M o n t h l y B u l l e t i n o n t h e E u ro p e a n C a r b o n M a r k e t

N°44 • Feb rua ry 2010 • A news l e t t e r o f CDC C l ima t Resea rch – i n pa r t ne r sh i p w i t h

Graph of the month:New volatility spike in 2009

2009 was characterized by the second historical volatility spike in Phase II of the market. This new peak of more than 100% corres-ponded to a trend reversal with the EUA price reaching an 8€ thres-hold (lower profits from EUA sales and stronger buying interest in anticipation of a stronger mid-term constraint). The first volatility spike in April-May 2005 was caused by the release of 2005 compliance data which indicated an over-allocation of Phase I allowances.

Source: CDC Climat Research based on data from ECX

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%20092008200720062005The end of the trial period from 2005 to 2007 did not mark the end of

the learning phase for the EU ETS. With the fallout from the global financial crisis, revelations of fraud and the overruling of the European Commission’s allocation decisions, what can we conclude about the operation and regulation of the European carbon market?

First of all, the EUA price was determined more than ever by market fundamentals. In 2008 and 2009, the EU ETS suffered from the consequences of the economic slowdown from the financial crisis. The allowance price reacted accordingly, dropping from 29 euros in July 2008 to less than 8 euros in February 2009. Over that period, compliance buyers saw their order books shrink, and along with them their projected need for allowances. At the peak of the crisis, companies were liquidating allowances on the market to meet cash flow requirements. The situation began to recover in mid-February 2009 and prices rose again in response to improvement in the economic outlook and renewed consideration of long-term carbon requirements.

Beyond the economic crisis, the European scheme was confronted with various types of fraud. The “carousel fraud” uncovered in 2009 and the recent ‘phishing’ attacks to hack into registries’ accounts reveal the need for vigilant regulation and market oversight. Although these two types of fraud are by no means specific to the carbon market, they have raised suspicions around this emissions trading scheme, which is still young. For example, the “carousel fraud” (failure by allowance sellers to pay back to Member States the VAT they collect) is estimated by Europol to have cost more than 5 billion euros to EU taxpayers. Most Member States quickly implemented VAT exemptions for allowances or modified their VAT collection procedures. In the cases of ‘phishing’ attempts, the alarm was sounded by the European Commission and carbon registries. Issues of coordination and harmonization, at the heart of the debates and draft directives over financial markets in Brussels, are thus more relevant than ever.

Finally, the EU ETS continues to be the target of criticism towards its ability to properly regulate emissions. According to its critics, other economic instruments, such as carbon taxes, or at least setting of a price floor for carbon, could be more effective at reducing emissions. However, the economic crisis has emphasized the risks of setting the cost of carbon higher than necessary. The ETS makes it possible to adjust the required reduction efforts and allowance prices as a function of the level of emissions, which in turn is governed by the economic environment, and that is one of its strengths too. The primary objectives must be to maintain constraints on emissions and ensure that no industry is exempt from them. That is why last December the European Commission appealed two decisions by the European Court of First Instance overruling the Commission’s allowance allocation plans for Estonia and Poland. Almost 8% of the allocation for the 2008-2012 period is at stake. A final ruling is expected in 2010.

Ultimately, the effectiveness of this market will be judged by the extent to which it achieves of its environmental objectives at the lowest cost. To do so, the price must continue to be allowed to respond to fundamentals, while also sending a price signal that gives industry an incentive to reduce emissions. This incentive necessarily requires credibility of the system and the transparency with regard to both market participants and society as a whole. Market regulation is a necessity, but regulation does not require micro-management of the emissions trading scheme at the risk of depriving the market of its flexibility.

Morgan Hervé-Mignucci – morgan.herve-mignucci@cdcclimat.comCDC Climat Research

Phase II: the EU ETS put to the test

Temperatures (°C)

• Average of BlueNext Weather indices* – France, Germany, UK and Spain – weighted by the allowances allocated to each country.

Precipitation (mm)

• Average of precipitation indices for Lyon, Oslo, Turin**, Vienna and Madrid, weighted by the hydroelectric share in each country’s electric power mix.

We

ath

er

Eco

no

mic

Act

ivit

y Production Indices

Opinion of Business Leaders

EU27 (base year 2000)

November 09

Monthly variation (%)

Variation/12 months (%)

Indust. prod. (excl. construction) 92.7 1.1% -6.5%

EU ETS sectors production* 89.0 -2.4% -7.3%

Electricity, gas and heating 91.6 -3.1% -6.9%

Cement 74.3 -1.2% -11.6%

Metallurgy 81.4 1.4% -6.8%

Oil refinery 90.2 -3.7% -8.0%

Paper and cardboard 94.8 0.9% -2.0%

Glass 84.0 1.6% -6.4%

Ceramics 84.7 11.5% -7.6%

Metal ore 95.9 6.5% -2.9%

EU 27 November December January

Industrial Sentiment Indicator -19 -16 -13

Inde

x, Ba

se Ye

ar 2

000 102

90

92

94

96

98

100

88Sep09

Oct09

Nov09

Nov08

Jan09

Mar09

May09

Jun09

Jul09

Aug09

Dec08

Feb09

Apr09

EU ETS Sectors Production (EU27)

Industrial Production (EU27)

90

108

102

96

Jan05

Inde

x, Ba

se Ye

ar 2

000

Apr05

Jul05

Oct05

Jan06

Apr06

Jul06

Oct06

Jan07

Apr07

Jul07

Oct07

Jan08

Apr08

Jul08

Oct08

Jan09

Apr09

Jul09

Oct09

Industrial Production (EU27)

Refinery (EU27)

Source: CDC Climat Research, based on data provided by Météo-France and BlueNext

Note: Production indexes reflect recent adjustments made by Eurostat

The cold snap which swept across Europe in December continued its assault in January with the average temperature plummeting to its lowest level (-0.8°C vs. its ten-year average of 4.2°C) since our records began in 1996. Germany, France and the UK all experienced below-average temperatures (-4.4°C, -2.8°C and -3.5°C below normal) while Spain had a modest decline (-0.5°C below normal). Overall precipitation in Europe was below its ten-year average (35mm vs. 54mm), despite higher-than-normal rainfall in Madrid, Lyon and Turin (by 16mm, 15mm and 6mm, respectively). The explanation lies in Oslo’s lowest precipitation (16 mm) since April 1997 which put its reservoir levels, compared to their ten-year averages, at their lowest levels since October 2006. On the contrary, with abundant rainfall in the last two months, reservoir levels in Spain were at their highest since June 2007. * The BlueNext Weather indices are defined on the basis of average temperatures, weighted by the population of the representative regions making up each country.

Sectoral Focus: Refinery (since January 2005)

Total Production and Production by EU ETS Sectors

Source: European Commission Source: Eurostat

Jun09

Jul09

Aug09

Sep09

Oct09

Nov09

Dec09

Jan10

Feb09

Mar09

Apr09

May09

2

0

4

6

8

10

12

14

16

18

20

22

Tem

pera

ture

(° C

)

Historical europeantemperature1999-2008

Europeantemperatureindex 2009

Reservoir Content for Electricity Production• Spread between the monthly rate of reservoir levels (%) and the ten-year average rate (%).

– 14– 12– 10

– 8– 6– 4– 2

02468

101214

Poin

ts o

f %

Nordic Countries

Spain

Nov09

Dec09

Jan09

Jan10

Feb09

Mar09

Apr09

May09

Jun09

Jul09

Aug09

Sep09

Oct09

In November, the European industrial production index rose 1.1%, while the index for sectors covered by the EU ETS fell 2.4%. This divergence could be attributed to the 3.1% fall in the production of electricity, gas and heating which holds a 70% weight in the calculation of the ETS index. This divergence may prove to be temporary, as the production of electricity, gas and heating would have recovered as temperatures plummeted since December. Improvement in order books and higher expectations in industrial production were primarily responsible for the increase in Industry Sentiment Indicator which rose 3 points in November. This month’s focus is on the refinery sector, which comprises 165 installations and accounts for 8%, or 152 Mt of annual allocation under the EU ETS. This industry is besieged by lacklustre demand which, along with falling oil and gas prices, puts pressure on profit margins. In November, refinery production was 14% below its recent peak in March 2008.

* Index weighted by EU ETS sectors’ weight in average total allocation over 2005-2007.

Source: Eurostat

December January

Monthly average (°C) - 2009 3.7 0.8

Monthly average (°C) - 1999-2008 4.6 4.2

Monthly minimum (°C) - 2009 -5.5 -3.1

Monthly maximum (°C) - 2009 9.1 4.8

December January

Monthly precipitation - 2009 55.1 34.8

Monthly precipitation - 1999-2008 ** 56.1 53.5

Cumulative over 12 months 765.5 742.2

Cumulative over 12 months - 1999-2008 ** 774.6 774.4

Source: CDC Climat Research based on data provided by Météo-France** Precipitation for Turin Bric della Croce, a new observation point for Turin, was not available prior to 2006.

Availability of Kyoto’s credits and allocation of allowances in the EU ETS

January saw oil prices fell by 11% (in $; 7% in €) while gas prices rose a whopping 18% (in €). Despite the rebound, which can be attributed to rising demand due to unseasonably cold weather, gas prices remained 36% below their last January level. On the contrary, oil prices have risen 56% since last January. Notwithstanding different fundamentals between these two commodities, speculation might have contributed to the ascent of oil prices. As concerns of monetary tightening in China and fiscal crises in some peripheral European countries mounted, some speculators liquidated their long positions in oil, whose prices thus fell. Though prices of coal and French electricity ended more or less where they started in the beginning of January, they experienced very different dynamics. While coal shot up 15% in the first five trading days due to extreme cold weather in China and higher freight rate, French electricity price lost 15% between 4 and 22 January as warmer weather returned to Europe. In comparison, CO2 seemed to have been in an island of tranquility all by itself with prices declining a mere 1%.

Energy PricesInstitutio

nal Enviro

nment

• Price of electricity and price difference between electricity and primary energy prices

• Primary energy prices

Source: Reuters, BlueNext, PowerNext, CDC Climat Research

En

erg

y

4

8

24

20

16

12

Aug09

Jul09

Jun09

Sep09

Oct09

Dec09

Jan09

Jan10

Feb09

Mar09

Apr09

May09

€/M

Wh

24

20

12

16

8

4

Gas Zeebrugge

Coal CIF ARADecember 2009 January 2010

Average closing price

Brent, in $/barrel 75.21 $/B 77.01 $/B

Natural gas Zeebruggemonth ahead

3.41 e/MMBTU 4.05 e/MMBTU

Amsterdam coalCIF ARA month ahead

53.62 e/t 60.18 e/t

Powernext Futures™ month ahead

Base 53.50 e/MWh 49.78 e/MWh

Peak 74.37 e/MWh 63.64 e/MWh

BlueNext spot price 13.48 e/t 12.98 e/t

Clean spark spread 27.38 e/MWh 19.94 e/MWh

Clean dark spread 25.30 e/MWh 20.20 e/MWh

CO2 switch price coal/gas 9.40 e/t 13.39 e/t

- 5

20

45

70

May09

Jun09

Jul09

Aug09

Sep09

Oct09

Nov09

Dec09

Jan09

Jan10

Feb09

Mar09

Apr09

€/M

Wh

Clean dark spread Tendances Carbone in €/MWh

Electricity Powernext FuturesTM month ahead Base in €/MWh

Clean spark spread Tendances Carbone in €/MWh

55 countries, accounting for 78% of global emissions, have signed up to the Copenhagen Accord before the agreed deadline of 31 January. The EU reiterated its 20% reduction target with a conditional 30% cut by 2020 despite oppositions from Poland, Italy, Cyprus and Malta. In January, 4.9 Mt of CO2 allowances were auctioned in the UK at €12.15. In Germany, 1.2 Mt of spot allowances and 2.28 Mt of futures allowances were sold at weekly auctions at an average price of €13.02 for spot and €13.08 for futures. The first auction of Emission Reduction Units (ERUs) took place on 8 January when 400,000 tons changed hands at €11.21, slightly less than the spot CERs (€11.40). To date, 4.5 Mt ERUs have been issued. France plans to revise its original plan on the carbon tax on fossil fuels after its constitutional court ruled the plan unfair and unconstitutional. The new bill, which may add a levy on utilities and factories covered by the EU ETS until 2013, is expected to be presented to Parliament before 1 July.

* New entrants reserves excluded. ** Bulgaria, Cyprus, Hungary, Malta and Iceland have not allocated their allowances

Source: CDC Climat Research, UNEP-Risoe CDM Pipeline and European Commission

CDM credits As of Jan. 2009 As of Jan. 2010 Change

Number of projects in the pipeline 4,475 5,688 1,213

Of which: - number of projects registered 1,300 1,985 685

- number of projects with CER issued 441 623 182

Cumulative volume of CER issued (Mt) 240 364 124

CER available 2008-2012 – UNEP Risoe estimate 1,518 1,092 -28%

CER available until April 2013 – CDC Climat Research estimate 2,150 1,275 -41%

European Union allowances January 2010 Jan. – Dec. 2009 Phase II til Jan. 2010

Allowances allocated for free (Mt)* - 1,847** 3,704**

Allowances auctioned/sold (Mt) 8 72 124

Total revenues of the allowances auctioned/sold (Me) 105 909 2,012

Dashboard

Source: BlueNext, ECX, Point Carbon

European Union Emissions Trading Scheme

Source: Météo-France, NordPool, www.mamr.es

Economic activity

Source: Eurostat

Energy prices

Source: Reuters, Powernext, CDC Climat Research

Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sept-09 Oct-09 Nov-09 Dec-09 Jan-10

Spot,Market (BlueNext)

Phase IIAverage closing price in e

12.68 9.46 11.23 12.92 14.51 13.25 13.75 14.61 14.17 14.05 13.54 13.48 12.98

Total monthly volume in kt 124,078 225,873 82,113 116,182 187,769 85,982 90,411 27,557 34,664 34,149 48,765 33,587 30,949

Futures Market (ECX)

Dec. 2008/Dec. 2009 Average closing price in e

13.19 9.71 11.57 13.31 14.86 13.49 13.91 14.72 14.24 14.08 13.54 13.78 13.70

Dec. 2012 Average closing price in e

14.82 11.17 13.98 15.57 17.22 15.66 16.23 16.89 16.03 15.83 15.10 15.14 15.48

Total monthly volume in kt 200,275 306,566 400,652 374,589 312,783 339,388 317,834 203,685 302,872 304,328 325,490 270,710 320,398

Total European market volume in kt (PointCarbon) 345,770 526,222 506,996 489,474 489,180 469,291 441,631 236,398 367,693 366,468 386,471 314,143 365,799

International Kyoto Credit Market

Source: Reuters, LEBA, NordPool, Nymex

Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sept-09 Oct-09 Nov-09 Dec-09 Jan-10

Spot Market (BlueNext)

Average Closing Price in e 11.67 9.11 10.59 11.02 12.23 11.61 12.45 12.99 12.81 13.17 12.71 12.24 11.68Total monthly volume in kt 4,084 2,764 1,936 5,264 3,357 1,881 3,164 1,870 2,403 3,384 3,051 2,385 2,860

Futures Market (ECX)

Average Closing Price in e 11.43 8.86 10.45 10.97 12.24 11.61 12.43 12.99 12.73 12.98 12.57 12.24 11.51Total monthly volume in kt 37,921 69,135 44,384 58,649 41,038 43,633 81,959 45,097 72,162 74,115 60,698 56,676 41,894

Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sept-09 Oct-09 Nov-09 Dec-09 Jan-10

Brent crude oil, 1st maturity, in $/baril 45.71 43.87 47.39 51.39 58.59 69.29 65.75 73.06 68.15 73.93 77.58 75.21 77.01Natural gas Zeebrugge, 1st maturity date, in e/MMBTU 6.36 5.46 3.55 3.33 3.18 3.15 2.71 2.69 2.73 3.58 3.39 3.41 4.05Coal CIF ARA, 1st maturity date, in e/tonne 61.16 61.53 44.97 50.31 45.63 47.64 48.03 51.21 47.10 49.71 51.99 53.62 60.18

Powernext FuturesTMmonth ahead, in e/MWh

Base 62.75 47.00 35.51 31.70 34.98 39.07 31.68 40.14 46.90 66.60 61.06 53.50 49.78Peak 81.16 58.59 43.68 41.70 47.25 52.24 43.18 52.08 63.47 94.46 82.05 74.37 63.64

Difference in prices of electricity and of natural gas, corrected for the price of CO2: Clean Spark spread in e/MWh

19.31 10.76 9.74 6.44 9.80 14.47 10.13 17.72 24.58 38.10 36.42 27.38 19.94

Difference in prices of electricity and of coal, correctedfor the price of CO2: Clean Dark spread in e/MWh

33.55 21.80 12.11 5.22 8.50 12.92 5.18 11.92 20.36 39.30 33.52 25.30 20.20

CO2 switch price coal/gas in e/tonne 42.66 33.82 16.55 10.58 11.60 9.92 4.12 1.98 4.91 14.06 10.01 9.40 13.39

Precipitations (°C) Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sept-09 Oct-09 Nov-09 Dec-09 Jan-10Vienna - difference monthly and decennial precipitation 2.1 7.3 30.6 -34.8 -3.7 118.5 35.5 -15.3 -38.3 -7.4 -3.1 -7.4 -2.2Madrid - difference monthly and decennial precipitation -0.8 8.9 -23.2 -21.9 -12.4 -3.3 -4.5 -3.5 -8.3 -44.0 -35.4 58.0 15.5Lyon - difference monthly and decennial precipitation -8.2 76.7 -27.5 -42.9 -39.3 11.1 -21.7 -51.7 -30.1 -21.5 8.5 15.4 15.3Oslo - difference monthly and decennial precipitation 14.3 11.5 6.1 -16.7 -22.1 -42.6 76.9 34.4 -46.5 -37.9 31.7 -7.8 -64.0Turin - difference monthly and decennial precipitation 16.2 6.7 64.7 204.0 -83.0 -33.3 0.3 22.0 -35.7 18.9 -0.5 -45.0 5.5Hydraulic Reservoirs – Spread between the monthly rate of reservoir capacity and the decennial average rate.Spain -5.1 0.8 -3.1 -5.5 -7.8 -5.9 -5.3 -4.8 -4.5 -3.6 -4.8 -2.2 13.5Nordic countries -6.5 -7.8 -9.2 -0.5 -2.9 -9.7 -9.3 -5 -0.6 -4.2 -3.5 -5.6 -13.1

Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sept-09 Oct-09 Nov-09 Dec-09 Jan-10Total industry production index (excluding construction and seasonally adjusted), base year 2000 = 100Europe 27 92.31 91.27 90.49 90.20 90.73 91.12 91.37 92.10 92.29 91.67 92.66 - -

WeatherTemperatures (°C) Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sept-09 Oct-09 Nov-09 Dec-09 Jan-10

Germany - difference monthly and decennial average -3.3 -1.7 -0.1 3.2 0.5 -1.3 0.5 0.9 1.0 -1.0 3.0 -0.8 -4.4Spain - difference monthly and decennial average -0.9 -0.8 -0.4 -0.9 1.0 0.7 0.7 1.1 0.1 1.1 2.0 0.2 -0.5France - difference monthly and decennial average -2.6 -1.4 -0.6 1.2 0.7 -0.6 0.3 1.0 0.6 -0.2 2.6 -0.3 -2.8UK - difference monthly and decennial average -2.2 -1.5 0.0 0.7 -0.2 -0.4 -0.9 -0.5 -0.7 0.5 1.3 -1.6 -3.5

Source: BlueNext

* Precipitation for Turin for September may not be comparable as it came from a different source.

BlueNext SAContact: Pierre Guigon, Tel.: +33 1 73 03 73 47p.guigon@bluenext.eu 5, boulevard Montmartre – 75002 Paris

CDC Climat Research is the research department of CDC Climat, a subsidiary of the Caisse des Dépôts dedicated to the fight against climate change. CDC Climat Research provides public research on the economics of climate change. The opinions and analyses herein do not bind BlueNext SA.ISSN: 1953- 0439

CDC Climat ResearchPublication manager: Benoît Leguet Contact: May Armstrong, Tel.: + 33 1 58 50 76 27may.armstrong@caissedesdepots.fr16, rue Berthollet – 94110 Arcueil