Emissions Trading / Carbon Market News (12/12/2022)

Dear Madam or Sir,

A lot is going on in European emissions trading at the moment. After the European Parliament, the Council and the Commission had already reached a historic agreement in the so-called trialogue to finally include shipping in the ETS, now the already started integration of aviation will be finally executed. Although aviation was already legally included in the ETS, this was rendered de facto ineffective by the allocation of free allowances. Now these free allocations are being phased out step by step. These are two extremely important sectors, because their inclusion in the ETS will achieve a greater degree of fairness, but above all it will create the incentive to invest in the best available technologies, as in the already integrated sectors, and thus to reduce environmental pollution on a large scale. The integration is to take place step by step in both sectors between 2024 and 2026.

And this week, the trilogue negotiations will continue, touching on a very sensitive point. The issue at stake is the “RePowerEU” programme, which is to be understood as a response to the energy crisis brought on by Putin’s aggression, as the European Commission explains on its website: “The new geopolitical realities and the energy market situation force us to drastically accelerate the transition to clean energy and make Europe less dependent on unreliable energy suppliers and volatile fossil fuels.” With this objective, the programme is thus congruent with the ETS, which also aims to achieve the transformation towards a carbon neutral society and industry.

However, it is the comparatively small funding gap of 20 billion euros that is sensitive and possibly even threatening for the emissions trading system. Under the impression of exploding energy prices, it seemed logical to some to kill two birds with one stone through the massive additional sale of emission certificates, namely first to finance the missing 20 billion and second to reduce the high energy costs. But with logic it is sometimes fatal, because if the basic thought is already problematic, then even the most logical line of thought leads to problematic results. An amusing example is the three people who eat something in a restaurant for 10 euros each and pay the waiter. The owner, however, sends the waiter back and asks him to return 5 euros as a small loyalty gift to the three guests. But since 5 a euros cannot be divided by 3 and the waiter had not received a tip either, he decided to keep 2 euros for himself and pay back 1 euro to each guest. So instead of paying 10 euros, each guest only paid 9 euros, making total of 27 euros. The waiter’s 2 euros take place on top of that, making 29 euros. The logic may look amazingly simple and clear, but the result is obviously wrong.

Since RePowerEU and the ETS pursue the same goals, it would be absolutely logical to use revenues from the ETS. However, it would be completely illogical to throw additional emission allowances on the market for this purpose. As a consequence, of course, the price of EUA would drop, reducing energy costs. It is estimated that CO2 accounts for perhaps 10 percent of the increased energy costs. So, it is not really effective. Moreover, it is not yet a foregone conclusion in what period of time what additional revenue can be generated if more allowances are sold but at a lower price. Moreover, it is anything but certain whether the massive oversupply will be permanently absorbed by the market. In the past, there have already been “normal” auctions that could not be closed due to lack of demand.

Moreover, it is absolutely not the task of the ETS to relieve industry of energy costs. That has to be done through other measures. The ETS, on the other hand, works as a cap-and-trade system, i.e. it is based on reducing the amount of allowances. And the “Fit for 55” programme is about, among other things, further sharpening this system in order to achieve the CO2 reduction targets and thus the 1.5-degree target. A glut of EUAs would undermine this and, moreover, make a nonsense of the Market Stability Reserve. In any case, it makes no sense to abandon the goals of the ETS even temporarily in order to finance the same goals in the RePowerEU programme. On the contrary, cheap EUAs also make coal and gas cheaper and would slow down efforts to phase out these energy sources. However, scientists have just vehemently pointed out once again at the World Climate Conference that even the efforts made so far to reach the 1.5-degree target are not enough. A delay or backtracking on the measures would be absolutely fatal. Therefore, if the ETS is to contribute to the financing of the RePowerEU programme, it should only be in line with the common goals, i.e. through higher prices and thus higher revenues in the ETS.

In the past trading week, the carbon market did not continue its massive upward trend with the same momentum, but held at a high level. On Thursday, the December contract reached a peak of 89.54 euros, but weakened on Friday and closed at just below 88 euros.

The new trading week is the last full auction week this year with a total of 9,397,000 EUA taking place at auction. This year’s auction calendar then ends on 19 December.

  (Average Quotes Exchange / OTC)   
EUA (Spot-Market)87.58 EUR87.88 EUR+0.30 EUR
EUA (December-2022-Future)87.67 EUR87.97 EUR+0.30 EUR
VCU (Voluntary Carbon Units ø)5.33 USD4.05 USD-1.28 USD
VER (Gold Standard Spotmarkt ø)2.97 USD2.91 USD-0.06 USD
nEZ (German National Carbon Units)30.00 EUR30.00 EUR+0.00 EUR
ICE Brent Crude Oil (Benchmark Future)85.84 USD76.64 USD-9.20 USD
EURO (Currency, Forex)1.0539 USD1.0534 USD-0.0005 USD

(The average exchange quotes and OTC-prices shows the average between bids and ask of several exchanges and OTC markets for carbon emission rights in the ETS. Bid and ask has usually in Spot Market a visible spread. The VER quotes are average rates (carboncredits.com), which can be used within the framework of CORSIA and voluntary carbon offsetting. Crude Oil and Euro Currency shows day-end-exchange quotes. This market information has just an informational character and are no advice or offer to trade carbon emission rights or their futures and options. If you want to unsubscribe, please reply to this mail.)

Please call our international carbon desk if any further questions exist: +49.2831.1348220.

With kind regards,

ADVANTAG Services GmbH