Strong fundamentals to support voluntary carbon markets, while EU's ETS slumps: sources

Voluntary carbon markets, or VCM, fell March 2 amid the Russia-Ukraine conflict, but the decline was not as sharp as the day-on-day drop in the EU's Emissions Trading System, or ETS, March 1.

Most participants said that the VCM may continue to soften as the conflict prolongs, but there was no dramatic drop is in sight, as the fundamentals were strong.

A trader said March 3 that the conflict and the ETS' fall was unlike to affect net-zero commitments, which generate demand for voluntary carbon credits. However, it was unclear how the VCM markets would reacts to movement in other commodities during the conflict, and it was difficult to provide a forecast.

"We still don't have clear vision how VCM behaves and correlates with crisis and shocks in other sector," the trader said. "Since EUA [EU Allowances] prices dropped sharply these past days, maybe there's a perception by market players that the price of carbon is dropping across all instruments. So, I'd say that the crisis may be impacting VCM indirectly."

Another trader said that a decline in prices in the compliance space would inevitably affect the VCM. "Maybe not at that scale however," said the trader. "But it's a crucial time. Prices are decreasing. We need to see the best we can do at the moment."

The voluntary carbon market was still driven by demand from market participants and corporate needs, and they had no need to offload their inventories now, according to the trader.

All segments of the VCM shed value March 2, but the drop appeared to be cushioned by most players holding on to their credits.

"I think, on the EU Allowances front, it is just some major players unloading, specifically funds. Voluntary front people are holding for now," a fourth carbon trader said. "There are some motivated sellers out there but very few bids. Most people are holding back for the time being."

The Platts CEC and CNC price assessment from S&P Global Commodity Insights declined 5% and 4%, respectively, on the day March 2, after the Platts EU Emission Allowance Nearest December contract slumped 16% on the day March 1.

Some participants, meanwhile, were looking at more competitive options.

"My buyers are starting to delay their carbon purchases and are looking for cheaper credits," a fifth market participant said.

February de-risking

Many participants, particularly those involved in futures trading, had already reduced their exposure over the past week as Russia invaded Ukraine late-February, the fourth trader said.

"We have already seen a large amount of de-risking on the CME's N-GEO and GEO futures; however, a large part of the market will not have trading access here [CME platform]," the trader said, adding that the over-the-counter market will likely decide to hold on to their positions.

"You might get some sellers lowering prices to cut positions, but if the demand continues to be limited, they will be forced to pull back offers."

Platts CEC fell 17% during February, moving to $6.40/mtCO2e Feb. 28, from $7.75/mtCO2e Feb. 1.

Platts CNC slumped 21% over February, moving to $12.50/mtCO2e Feb. 28, from $15.90/mtCO2e Feb. 1.

Other segment-specific factors that contributed to the February loss, include a vintage-change on the CBL's Xpansiv N-GEO contract and cyclical factors. The VCM typically sees prices increasing around the end of a financial year. The prices usually rise at the end of March or December, suggesting that in the months before or immediately after these periods, demand tends to be lower.

Prices drop

Prices continued to drop during early morning trading March 3, with the Xpansiv CBL's GEO spot contract last trading at $6.00/mt March 2 afternoon, with 2,500 mt involved in the trade, down from a trading level of $6.10 the previous day, according to Xpansiv CBL's data. The contract was bid and offered in the $5.50-$6.10/mt range, with 2,000 mt involved on each side March 3, compared with $5.40-$6.50/mt at 1200 GMT March 2, involving the same volume.

CBL's N-GEO spot contract was last trading at $12.20/mt (1,000 mt) 1406 GMT March 2, down from a previous trade at $12.50/mt (5,000 mt) March 2 morning. The contract was bid and offered in the $10-$12.65/mt range, with 1,000 and 5,000 mt on both sides, according to CBL's data. The N-GEO spot contract was bid and offered in the $12.20-$13.00/mt range, with 1,000 mt on each side at market close 1200 GMT March 2.

Prices also weakened in the CDM-certified segment that saw increased demand and prices over the past months.

"Indeed, all prices are dropping. I've been noticing a cascade effect," said another trader. "The price drop is reaching some CDM projects, but to a lesser degree than it was the case for GEO/N-GEO contracts."