Carbon Bulls at Three-Year High in Options Market on Surplus Fix

Feb 19, 2014 12:24 pm ET

Feb. 19 (Bloomberg) -- Options traders are the most bullish on European Union carbon permits in three years amid optimism the bloc’s nations will sign off on a plan to support prices by withholding the supply of some allowances.

Calls that pay should emission prices rise 10 percent from current levels cost 5.8 percentage points more than puts betting on a 10 percent fall, according to three-month data compiled by Bloomberg. The price relationship has favored puts by a 2 percentage-point margin on average for the past three years.

Carbon surged 38 percent this year as EU lawmakers backed a plan aimed at lifting emissions prices toward levels that will discourage the burning of fossil fuels and spur investment in clean energy. The cost of the permits, the best performers of 80 commodities tracked by Bloomberg, may double by 2015, according to a forecast by ABN Amro Group NV.

“The options market appears to be factoring in the bullish price pressure,” said James Cooper, a carbon analyst in London for Bloomberg New Energy Finance. Sellers of call options are seeking higher premiums because of the expected gains in allowances, he said yesterday by e-mail.

December futures soared today to a 13-month high of 7.05 euros a metric ton since reaching a record-low 2.46 euros in April on the ICE Futures Europe exchange. The permits climbed 2.5 percent to 7.01 euros a ton as of 5 p.m. in London.

Price Plunge

Under the EU’s emissions market, permits to emit carbon dioxide are allocated for free or auctioned to about 12,000 factories and utilities that must have enough to cover their discharges or pay fines. Prices plunged from as high as 31 euros in April 2006 as the financial crisis damped industrial output, curbing the need for pollution rights.

Carbon is rebounding as the European Commission prepares to cut supply over the next three years by the equivalent of about half a year’s supply of permits. Those allowances will be returned, or backloaded, to the market at the end of the decade. Final approval of the plan by nations is scheduled for Feb. 24.

Implied volatility, used to track options prices, for puts with an exercise price 10 percent below December futures was 55.9 percent yesterday, compared with 61.7 percent for calls 10 percent above, three-month data compiled by Bloomberg show.

The price difference favored calls by as much as 6.3 percentage points on Feb. 7, the most since February 2011 when carbon prices averaged 14.98 euros a ton.

Options give holders the right, but not the obligation, to buy or sell an asset at a set date and price. Options to buy are calls; contracts to sell are puts.

--Editors: Andrew Reierson, Dan Weeks