CF PARTNERS CARBON MARKET SNAPSHOT

29 March 2011

MARKET PERSPECTIVE

CF Partners Market Pricing

Primary:- CER Issuance Up by 513k Primary CDM Last week, the CDM Executive Board issued 3.373 million CERs to 25 projects, slightly above Post PIN, Pre PDD, HC Approval 7.50-8.75 the level of last week (2.86 million CERs). Still in pole position, China (52.64%) is the main At Validation 8.75-10.25 country of issuance followed rather closely by South Korea (32.72%) and South/Central Registered & Non-Guaranteed 10.25-11.00 America (9.40%). The overall amount of CERS issued in March is now close to 15 million. Guaranteed 11.50-13.00 Secondary:- EUAs Gain 10% since March 1st 70-80% sCER Since March 1st, carbon has soared by some 10% and last week market participants kept the Post 2012 EUA Dec11 contract above the important psychological support level of 16.00, with closing Exchange Prices prices between 16.59 and 17.24 and an intraday low of 16.22. One source of underlying Spot CER 13.02 support for current price levels, prior to compliance season kick-off, is the need for some Spot EUA 16.59 speculators to close their short positions, most of them opened at the top of last years ECX DEC 11 CER 13.01 trading range and upset by recent political events and natural disasters. Another source is the ECX DEC 11 EUA 17.28 state election results in South Germany on Sunday, which may lead to a further strengthening ECX DEC 12 EUA 18.01 of a long-term, nuclear free generation policy. Spot EUA - CER Spread 3.57 EU-ETS Special:- International Aircraft Operators Join Forces Against the EU EUA Repo Rates % Instead of suing the EU Commission directly, the China Aviation Transportation Association 3.04 (CATA) announced on behalf of three Chinese Airlines its intention to join the US lawsuit 2 YR Repo against the incorporation of non EU Airlines into the EU-ETS from 2012 onwards. CATA 3 YR Repo 3.34 stressed that they also addressed this topic to the Chinese Government, which should directly 5 YR Repo 3.76 take adequate measures against the EU. Source: ECX, BNX and CF Partners at 28/03/2011

MARKET DATA: TRADE POST-2012 EUAS

This week, we delve into the futures market to get an understanding of pre vs. post 2012 price action. Futures prices are theoretically computed using the underlying contracts spot price as well as riskfree interest rates. As a result, when traded prices deviate from fair value, we can use this information to infer whether market participants supply and demand expectations have changed. This explains why Phase II CERs get cheaper as delivery gets closer to March 2013; market anticipates excess supply down the curve compared to near-term deliveries. On the other hand, the EUA forward curve displays a more common contango shape, with Dec13 trading between 1.36 and 2.08 higher than Dec11 over the past 6 months, as per the chart attached. While 1.36 was actually a 2010 low, 2.08 is already close to 2010 highs due to increasing EUA spot prices coupled with increasing risk-free interest rates ( 2-year swap rates) since the turn of the year. This is quite significant for all EU-ETS participants as optimisation of Phase III carbon positions starts to become essential. With EUA spot prices not expected to retreat significantly from their current levels, if they do at all, as well as expansionary monetary policies kicking in to stifle inflationary pressures, Dec13 Dec14 prices might keep on getting comparatively more expensive than their Dec11 and Dec12 counterparts. It might therefore be relevant to start considering calendar swaps as a way to hedge a Post-2013 short position at a decent level.

% (swap rate) or (spread)

2.40

17 16.5

2.20 16 2.00 15.5 15 14.5 1.60 14 13.5 EUA Spot EUR Swap Rate 2Y Dec13 - Dec11 EUA Spread 13 12.5 12 1-Oct 1-Nov 1-Dec 1-Jan 1-Feb 1-Mar Source: Bloomberg

1.80

1.40

1.20

1.00 1-Sep

NEWS OF THE WEEK

UN Panel decides: JI Project Registration Fee for Small Scale Projects down to $3,000: In order to strengthen the supply of JI issued ERUs, the UN Panel reviewed the project registration fee structure and adjusted it in accordance with the need to increase supply. UK Sets 2013 Carbon Price Floor at 16: The Department of Energy and Climate Change announced a price floor for EUAs which comes to effect in early 2013. The Department evaluates the price floor as a clear positive sign for investors. North Korea Seeks to be Part of the Global Carbon Offset Market: Hydropower plants in North Korea, if approved by the UN, could be produce carbon credits in order to secure more sources of cash for the isolated country.
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