Dear Madam or Sir,
With the step-by-step introduction of the European Agreement about a Carbon Border Adjustment Mechanism (CBAM), which has now been decided, the EU has made a major breakthrough. For many years, one of the most dissatisfying elements of the European Emissions Trading Scheme (ETS) was that companies were given large amounts of EUAs in the form of free allocations to counter the risk of so-called carbon leakage. This is understood to mean that companies could relocate their production to other countries with more lax emission restrictions for cost reasons related to the ETS. That would mean a significant locational disadvantage for Europe and could also lead to a rise in overall emissions. Although the free allocation of EUAs averted the danger of carbon leakage, it significantly undermined the goal of reducing emissions.
By introducing the world’s first “climate tariff”, the EU has now turned the tables. The planned levy will affect particularly CO2-intensive products such as iron and steel, cement, fertilisers, aluminium, electricity and hydrogen. Other segments could be added in the coming years. So from 2026, companies will have to pay a tax when importing the products concerned if they cannot prove a comparable climate levy in their country. The border adjustment will be increased in phases from then on, and will finally take full effect from the mid-2030s. The amount of the levy is based on the respective EUA price.
The EU is also pursuing the goal of promoting this price instrument worldwide. The “climate tariff” is thus a means of exerting pressure on trading partners to introduce carbon pricing and accelerate emission reductions. At the same time, free allocations can be phased out here in Europe, forcing intra-European companies to reduce their carbon emissions more quickly.
Last trading week, the carbon market had a real surprise to deal with. On Tuesday it became well-known that frontloading, i.e. the advance auctioning of EUA to generate €20 billion under the RePowerEU plan, which we had viewed very negatively, would not start already this year as expected, but only with the 2024 auction calendar. Within only 2 hours, the course then shot up by a good five euros and almost reached the mark of 91 euros again.
But the euphoria was unable to hold for long. Obviously, the strategically oriented market participants quickly realised that the principle “postponed does not mean cancelled” takes place here. Spontaneous profit-taking led to a massive correction immediately afterwards, which completely cancelled out the previous gains and pulled the price down by a further two euros. The price then found support at slightly above €83 and then meandered around the €85 mark.
| (Average Quotes Exchange / OTC) | |||
| Instrument | 28/04/23 | 05/05/23 | Change |
| EUA (Spot-Market) | 85.85 EUR | 83.47 EUR | -2.38 EUR |
| EUA (December-2023-Future) | 87.34 EUR | 84.96 EUR | -2.38 EUR |
| VER (Natural Carbon Offsets) | 2.69 USD | 2.11 USD | -0.58 USD |
| VER (CORSIA eligible Carbon Offsets) | 1.67 USD | 1.49 USD | -0.18 USD |
| nEZ (German National Carbon Units) | 30.00 EUR | 30.00 EUR | +0.00 EUR |
| ICE Brent Crude Oil (Benchmark Future) | 80.26 USD | 75.30 USD | -4.96 USD |
| EURO (Currency, Forex) | 1.1033 USD | 1.1127 USD | +0.0094 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