I couldn’t help but smile when I read the following headline in Point Carbon on 22 June 2012: “Barclays slashes CO2 price view, says sell EUAs.” This is in addition to “Barcap slashes 2012 carbon price outlook” (10 January 2012). It’s from the same people who brought you this: “Price outlook: Future prospects – up, up and away;” (Barclays Capital Monthly Carbon Standard, 9 February 2010), forecasting CERs at 15 Euros in 2011 and 18 Euros in 2012. CERs price today: 4 Euros.
Going further back in time, how about: “… carbon will need to rise to promote the required amount of fuel switching. The best way for investors to participate in this rise looks like being via the EUA market rather than CERs, where we think uncertainty over their status post 2012 will result in further widening of the EUA-CER spread.” (Barclays Capital, the Commodity Refiner, Summer 2008). CER price in summer 2008: 20 Euros.
Barclays are by no means the only ones who missed price forecasts consistently for some five years now, by an enormous margin. They are in very good company; most mainstream brokers pretty much consistently forecast the opposite of what in fact did happen – almost without fail. It is commendable that most haven’t given up forecasting prices despite such an awful track record: it must be because their trading desks are still able to generate business to cover their costs from this courageous recklessness.
Hindsight, of course, is cheap. And brokers have very good people doing the best that they can. So what’s gone wrong?
As I argued in Part One of this series, the designers of the EU-ETS somehow managed to forget the law of supply and demand. They set up the system with a fixed supply of emission permits (using optimistic growth scenarios for Europe) over a considerable timeframe but ignored the fact that demand varies daily and with economic conditions. They also omitted safeguards in the system (e.g. a floor price or a mechanism to adjust supply to demand). However, the designers did manage to give birth to a market worth several hundred billion dollars (USD 176 billion according to the World Bank). While Europe burns, the polluters and the brokers both make money (see Part One for an explanation of how the polluters are making a killing while having an incentive to pollute at current price levels). The brokers clearly can’t ignore the market - hence the random price forecasting literature necessary to fuel trading and broking revenues.
We have learned the hard way - consistently and for more than five years - that forecasting carbon prices isn’t working. Regulatory-driven markets are subject to the absolute power of the regulator. And in this instance, the regulator (a combination of the EU Commission, the EU Parliament the European Council) is all-powerful and, although otherwise engaged, is determined to do the right thing. Doing the right thing sometimes takes time as the Europeans have been trying to explain to the market for some two years now.
My take-away: sell banks, buy Euros.
Assaad Razzouk is Group CEO of Sindicatum Sustainable Resources, a global sustainable resources company headquartered in Singapore.