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Mr. Stephane Colin, Executive Director, Saga Commodities JSCo.

Mr. Colin, what is the state of the global carbon market after the COP21 agreement in Paris? 

It is an interesting question. This Paris agreement is really a step forward as for the first time there is an incentive to make individual, voluntary commitments to contribute to the global goal marking the beginning of a new era in the cooperative effort to limit climate change. The vast majority of governments around the globe—189 countries representing 96 % of GHG emissions and 98 % of the world’s population —have committed to reduce their GHG emissions and adapt to the changing climate through their nationally determined contributions.

For us as traders the most promising and efficient approach is through the implementation of carbon pricing mechanisms. One of the main challenges is the carbon price because there are different markets. Already, about 40 national jurisdictions and over 20 cities, states, and regions are putting a price on carbon. This translates to a total coverage of about 13 % of global GHG emissions. This share has tripled over the past decade.

In 2016 we saw the launch of two new carbon pricing initiatives: British Columbia put a price on emissions from LNG plants alongside its carbon tax, and Australia implemented a safeguard mechanism to the Emissions Reduction Fund. At the same time, in the last year Kazakhstan suspended its ETS temporarily, for the 2016–2018 period, and South Africa delayed the start of its carbon tax to 2017.

Looking ahead, 2017 could see the largest ever increase in the share of global emissions covered by carbon pricing initiatives in a single year. If the Chinese national ETS is implemented in 2017 as announced, initial unofficial estimates show that emissions covered by carbon pricing initiatives could potentially increase from 13 % to between 20 to 25 % of global GHG emissions. The Chinese national ETS would become the largest carbon pricing initiative in the world, passing the EU ETS.

We believe that the decisive step towards the launch of a global carbon market is yet to come as all these single initiatives need to be connected by an instrument. Strangely, I believe that we were closer to this target with the Kyoto offsets – the Certified Emission Reductions (CERs) and the Emission Reduction Units (ERUs), and they no longer exist. Why would I be interested in buying Chinese emissions rights if there are not connected to the European ETS even if their price is very low? What I want to say is that U.S. and Chinese markets are interesting because they cover a large portion of the global effort but in the current structure it is yet hard to talk about a global carbon market in the strict sense of this word.

Do you expect rising CO2 prices in the coming years? What would be the most probable price levels?

The effects of the Paris agreement on carbon price was hardly reflected on the European carbon price. At the moment of signing the EUA price range was about 8 – 8.70 EUR/t in the first quarter and a slight recovery in May, after which we went back to below 4 EUR. There is a slight growth, with price levels standing at 6.40 EUR, but the immediate effect of this agreement on the European market was negative.

The main drivers of the carbon price are the energy price and other energy related products. When the power moves up, the carbon price follows, plus the demand for carbon comes mainly from the utilities.

Otherwise, the carbon price is defined by the offer and demand and we still have a surplus of over a billion EUAs coming from Phase 2 of the ETS. It will be hard to see the carbon price increase dramatically, as long as this surplus is not absorbed. The European Union is aware of this problem and for this reason there are actions taken to reduce the offer which go through the backloading mechanism and the EUA auctions. The backloading measure reduced the volume of the state auctions for the last three years and the hold EUAs were moved to a pool which will be sold in the two last years of this Phase. In practice, next year the auctions will return to their initial volume which implies an increase in the offer and most probably a reduction in price in the first quarter. In order for green investment to be stimulated, the carbon price in the EU has to become double digit amount otherwise it just remains an additional cost for the industry. The possible price reductions will help the industry do the compliance in April at a lower cost.

If you ask me about the Bulgarian market the industrials don’t have a strong sensibility towards price fluctuations. They rather make purchase decisions based on the available treasury. When the industry becomes stronger, the managers will be able to take better informed decisions.

Are Bulgarian industrial and power companies prepared for the new carbon market challenges? What should they do in short and medium term?

The focus of our trading activity is on the European ETS. The challenges of the global agreement need to be met at the governmental level through the national measures and policies and only then they will reflect on the industrial and power companies’ activity. The main participation of the Bulgarian utilities remains under the European trading scheme. The new challenges for these participants are to face the deficit of emissions allowance. Until 2013 most of the installations had a surplus which was accumulated and they used to cover the reduced free allocation in this phase. Now, in 2016 this surplus is already consumed and the challenges for the companies are to build comprehensive strategies to hedge their deficit as they produce in order to keep or even increase their competitiveness in the industry. So what it takes to be well prepared? First, you have to plan enough treasury in order to catch opportunities as they come on the market according to the strategy you set up at the beginning of their year and that you adapt to the fluctuations of your production cycle. Bulgarian companies basically go on the market only when they have the necessary funds which poses a risk in terms of the price as the moment when they have the cash does not necessarily correspond to the best market conditions. They do a quantity forecast in terms of needed emission rights, but there are only few that set up a price strategy for buying. This is why we try to advise our clients in terms of buying strategy that would allow them to meet their obligations in a smarter and more efficient way. We have the solution. Having the cash is not enough. Being prepared is also a question of understanding the market, so we work together with them on the data treatment and market information. I would like to point out that this approach is not relevant only for the Bulgarian companies; most of industrials have kept these reflexes from the times when they had to manage a surplus of allowances. This observation applies for Bulgaria, but also for Romania, Poland and other countries from Central Europe.

What are the services provided by Saga Commodities in Bulgaria? What solutions could you provide for Bulgarian and other companies?

First, a little bit of background on Saga Commodities. Тhe Bulgarian company  was created in 2011 but we were known already by the Bulgarian clients, as our team performed a similar activity under the name SagaCarbon, a company owned by the French state. We had operations in Europe, Asia and the U.S. which, for internal reasons, had to be terminated. We decided to continue in countries where we had the most clients, namely the Eastern European countries. We have operations in all of them, with our headquarters in Sofia and a subsidiary in Warsaw which handles the Northern markets.

Our main activity is to provide advisory and brokerage services in emissions trading. In terms of products, we propose financial instruments that we combine in individual strategies for the clients depending on their activity. In some cases we need to change the state of mind of the decision makers. For example, the decision to intervene on the market on a regular basis and to build an average market price is seen by some as speculation but in fact it is the most reasonable solution to deal with the price fluctuation. The real speculation is not to take any action in advance. Thus, you take a 100% market risk as you produce without knowing the part of carbon in your production cost. We strongly advise clients to avoid last minute trading. In some countries, such as Poland, we also offer trading in local currency, where the customer buys at an average market price for the given month and the price is in Polish zloty.

We also offer other products with more optionality, but in my view the average is the most reasonable, as you can split your emissions according to seasonal or monthly fluctuations.

We also have a product called the ‘Tunnel’ – where there is a lower end price and an upper end price. The client would thus have a cap on the payment in case of price fluctuations above or below the selected price range. There is another product which is the capped average price: we define a maximum price for a given maturity. At expiry, the client pays whichever is lower – either the cap or the average for the defined period. Bulgarian clients, however, tend to select forward and spot products because they prefer to have a fixed price on their carbon cost which is defined at the signature of the contract. Trading forward compared to spot gives a very close price but with a treasury facility as the client pays only a deposit at the signature of the contract.

What are the future plans of Saga Commodities for development in Bulgaria?

We have several activities and carbon is one of them. One of our other business lines is biomass trading. We produce wood chips in Bulgaria and we export them to MDF producers abroad. As the country is small I think we have reached the realistic limit for wood cutting in Bulgaria, so we are also looking to expand this business in other countries outside the European union.

We also have a power trading license in Bulgaria as we are trying to move towards combined products of electricity and emissions trading, thus,  the client can sell electricity and get emission rights at an average price.. Our focus is on the internal market and on large-scale customers. In the future we would like to establish better relations with public companies in Bulgaria, but it is hard to rationalize the way they buy. But I think we could offer them good strategies for managing emissions. It is always a question of price, but I think good relations to customers determine the degree of success. This is why we have some 80 percent of the emissions trading in Bulgaria. We also have good positions in Poland and Greece, among other countries.

Questions by Lyudmila Zlateva







Stéphane Colin is the general manager of the company. He has a master degree in finance from Université Paris Sorbonne and large experience on the financial markets. He started his career as a market maker on financial derivatives. Later he developed projects in the IT sector and listed them on stock exchanges. He created the French carbon broker Sagacarbon SA in 2005, just at the beginning of the ETS and sold it to Caisse des Dépots –the French public bank while remaining its executive director until the end of November 2011 when CDC decided to close the carbon related activities. Stéphane Colin knows perfectly the functioning of the carbon market and has been directly involved in numerous carbon transactions.

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