It seems that this is what we can interpret from the price of European Union Allowances for CO2 in Phase I (EUAs) within the European Trading Scheme (ETS). Yesterday, prices for EUAS prices were slightly above 1.5 euros per tonne. This means that any installation that emits above the allowances they were allocated, could comply just paying 1,5 euros per tonne of CO2 that they produce in excess. The ETS, considers two phases, Phase I going from 2005 to 2007 and Phase II going from 2008 to 2012. The amount of CO2 allocated to industrial installations in each phase is established in National Assignment Plans that have to be approved by the EU. Any amount of CO2 produced by installations in excess of their allocations has to be bought in the markets for EUAs.
One the feature of the ETS is the non-bankability of EUAs. This means that EUAs from Phase I can not be brought forward to Phase II. This implies that prices between Phase I and II can go unrelated. This is what is happening now. The prices for EUAs for Phase II are trading above 15 euros per tonne. This all tells us that the market is long of EUAs for Phase I and probably that is how the market will end up in December 2007. Parson and Ellerman suggest a measure of the probability of the market being short at the end of Phase I. This is made of the ratio of EUA prices divided by the price for EUAs in Phase II plus 40 Euros. 40 euros is the penalty per tonne for any firm that does not comply. Currently, this index tells us that the probability of the market being short at the end of Phase I is 0,02 %. Too many allowances have been allocated for Phase I within the ETS. Is it free to emit?