Bullish EUAs Amid Soaring Gas Prices & Carbon Market Reform Making Headway
By Eron Bloomgarden, Partner at Climate Finance Partners (CLIFI)
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Despite the current macroeconomic and geopolitical uncertainty in Europe, the outlook for EUAs remains bullish for the long term largely due to higher emissions from coal-burning utilities amid soaring gas prices and the EU reform package kicking in.
The news this week of the European Commission's new regulatory proposal to lighten demand for natural gas ahead of the winter demand season prompted additional selling of EUAs over concerns that energy cuts will translate into demand destruction of energy and industrial users.
There is likely to be increasing upward pressure on emissions from coal burning because of increased energy demand driven by record-breaking heatwaves across Europe and the rationing of natural gas. While there may be a short-term loosening of regulatory policy to provide some immediate relief, long term there is likely to be significant upward price pressure on EUAs from growing emissions as well as the geopolitical urgency to decarbonize the European economy as quickly as possible.
Going into Q3, auction volumes in the EU ETS will be reduced in line with this year’s Total Number of Allowances in Circulation (TNAC). This is due to this year’s surplus of allowances exceeding a threshold of 833 million allowances. Additionally, there is now a predetermined percentage (24%) of the surplus is withheld from auctions to tighten supply and added to the Market Stability Reserve (MSR), causing rising price pressure on EUAs.
Also, continued energy market developments, especially additional coal capacity to be made available in response to plummeting Russian gas and Germany’s already passed emergency legislation to reactivate coal-fired plants, will act as bullish price drivers for the coming months.
Beyond 2022, the long-term bullish outlook will likely be driven by higher power sector emissions as well as the new ETS tightening reforms that will set in.
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