Carbon Volatility Jump Hastens Trading Retreat: Chart of the Day

May 13, 2014 10:42 pm ET

May 14 (Bloomberg) -- Prices for European Union pollution rights are the most volatile among major commodities from oil and gold to wheat, contributing to a trading exodus from the world’s biggest carbon market.

The CHART OF THE DAY shows price swings surged to the highest in nine months on April 2, with prices falling more than 10 percent four times this year. Carbon trading on the ICE Futures Europe exchange in London plunged 37 percent last month in the biggest decline since 2011.

Banks from JPMorgan Chase & Co. to Barclays Plc are withdrawing from or scaling back commodity businesses as revenue falls and regulators step up scrutiny of lenders’ control of physical commodities. Carbon traders have had to contend with three years of political wrangling over reducing an unprecedented glut that drove prices in the bloc’s $47 billion program to a record low last year.

“A lot of big speculative traders have exited the market,” Matthew Gray, an energy analyst for Jefferies Group LLC in London, said yesterday by e-mail. “To get the old carbon market back, the European Commission needs to implement changes that enhance traders’ confidence in the system.”

Carbon’s 30-day historical volatility more than doubled this year to 93 percent on April 2, the highest since June, data compiled by Bloomberg show. The measure for the December 2014 futures contract was 56 percent yesterday.

Futures prices that tumbled as much as 92 percent from their peak in 2008 spurred EU lawmakers in March to curb supply by postponing sales of some pollution permits. Carbon rallied as traders anticipated the changes before plunging 34 percent in April on speculation the EU’s intervention will take longer to boost prices.