In spite of strong demand for options on emissions allowances, banks are unable to tap this market because the European countries in the scheme have not finalized allocations of allowances. The market kicked off at the start of the month, but allocation announcements are not due until the end of February. Some countries, including the U.K., look set to miss the deadline. Brokers report significant interest in emissions options from corporates operating under the scheme, but say banks cannot sell options until there is away of hedging them with a spot market.
James Emanuel, broker at Evolution Markets in London, said even beyond the announcement of national allocation plans, banks' credit risk departments are likely to require historic volatility data before they give the go-ahead for options pricing. One official estimated the options will now not be priced until the second half of the year.
Corporates operating under the scheme will have to hold enough allowances at the end of each calendar year to cover their carbon dioxide emissions for that year. Officials said corporates will be interested in buying options to purchase or sell physical allowances because they will not be sure how many allowances they will need. Mark Woodward, policy and compliance manager at the International Petroleum Exchange in London, said, "This looks, smells and feels like an options market." Emanuel agreed the allowances market is suited to options. "There are a lot of people happy to buy options," he noted. But until banks are able to hedge the instruments, they cannot take advantage of this untapped demand.
