Why were EUA’s sharply up, then sharply down on Russia invasion news?

Feb 23, 2022: Initially, the Russian invasion of Ukraine was having an impact in line with the view we have been expressing—that an invasion of Ukraine would create higher energy prices.  As predicted, energy prices are being driven higher by the more limited supply of natural gas now that the Nord Stream 2 pipeline is essentially frozen until Russia ceases aggression. Higher gas prices result in fuel switching to coal as “greener” gas becomes more expensive. As a result, more coal is burned, which means we'll see higher emissions and more demand for carbon allowances. This explains the intuitive rally yesterday.

Having natural gas up 30% and carbon DOWN is an anomaly. However, I have noted in the past few months that this correlation has broken down as gas prices have moved coal-to-gas switching much further up the marginal abatement cost curve (MACC).

Feb 24, 2022: Speculation on what is powering the sell-off today is currently based on two schools of thought. Some see huge margin calls across the broader global equity investment landscape, creating liquidity needs that are tugging on all risk assets – the old chestnut of “risk-off” mode.

The other view is that yesterday's gains were short-sighted. While high energy prices mean more demand for carbon allowances, the overall economic impact could push Europe into a recession (which more than negates the “benefit”). This take is something of a circular view, as we could be in for some volatility as the market figures out exactly what this really means. It’s worth noting that compliance buyers showed up to scoop allowances at the lows.

Also, note that CCA Q1 auction results will come out this afternoon, so expect some price reaction relative to the auction result vs. consensus (ie. futures price). Stay tuned.