With airplanes grounded, market tests pollution credit demand

The European Union’s carbon market will test how much airlines still need allowances to cover greenhouse gas pollution.

With many flights grounded and carbon prices on the slide, auctions scheduled for new permits in the Emissions Trading System are about double the normal size. That raises the risk that one of the auctions will fail, which would be an indication that demand for the securities is weakening.

Trading on Wednesday will be further complicated by the expiry of March options.

“Overall, it is impossible to not remain bearish unless there is a coronavirus-related miracle,” Redshaw Advisors said Monday in a research note.

Poland will auction 5.3 million tons of allowances starting at 9 a.m. in Brussels on the European Energy Exchange. At 1 p.m., 1.7 million aviation allowances will be put under the hammer on ICE Futures Europe. It’s more than double the normal daily size of 3.1 million tons.

The EU sold permits on EEX on Tuesday, then futures rose as much 11%, the biggest intraday gain since November 2018.

The current price of carbon is about a third lower than it was two weeks ago, and there’s little indication of a rebound while much of Europe’s economy remains on standby.

“Seeing a bloodbath on the market as we’ve seen the past few days, makes it difficult to assume the point that people get back in with large volumes,” said Marcus Ferdinand, head of European power and carbon analytics at research company ICIS, in a phone interview.

Auctions fail when there aren’t enough bids or bids are too far below market prices. Airlines have been some of the hardest hit businesses during the coronavirus crisis, with Ryanair Holdings Plc, Lufthansa AG and British Airways cancelling flights as restrictions related to the health crisis spread.

Profits from burning coal for power remain low or non existent, suggesting utilities probably won’t be big buyers.

“With options traders balanced and investors’ long positions liquidated, big moves down are unlikely,” Redshaw said in its note.