Keys to explaining the 2021 explosion
A record year for the EUA, which started 2021 with a record high of 34.25 €/t on Monday 4 January. 11 months later, at the beginning of December, the EUA recorded values above 90 €/t. What happened?
The CO2 price increases in 2021 are mainly due to 2 major events. The first is the presentation of the Fit for 55 reform package on 14 July. This proposal will generate an increase in demand as well as a structural deficit in supply within the EU ETS after the cap reduction, the revision of the MSR and the inclusion of new sectors such as the maritime sector in 2023. The impact on prices is mainly noticeable in the first part of the year.
Regarding the second part of the year, and referring to the second relevant event, the behaviour of gas prices may have been behind the continued price increases in the entitlement. The low levels of storage in Europe, the tensions surrounding Nord Stream 2, the strong Asian demand for gas and the economic recovery have led the TTF to trade above 100 €/MWh, thus favouring the burning of coal over gas in electricity generation. A Refinitiv report, published in October, claims that this “anomaly” generates an extra 30 million tonnes of CO2 consumption.
The sharp increases in energy prices have been significant in European industry, and continue to be so, even leading to temporary closures of factories affected by the EU ETS, sparking concern among EU institutions. This is why the European Commission presented a “Toolbox” in October, whose proposed solutions do not address the root of the problem and only invited Member States to use part of the revenues from the auctions to finance the energy bills of the most vulnerable. They also ordered ESMA, the European Securities and Markets Authority, to study possible abusive practices in the market.
November and December have only added more pressure to the price. Behind the impressive rally (from €60/t on 10 November to over €90/t on 8 December), several factors can be found. The new climate ambition explains several of them. The COP 26 in Glasgow and the will of the new German coalition to establish a minimum price of €60/t for German industrialists in the EU ETS may be a good example of this. Nor should we forget more market-related factors such as the expiry of options on 15 December or the confirmation in a preliminary ESMA report that the increase in speculative players had occurred in proportions homogeneous to the market evolution and that their open positions represented only 8% of market positions. ESMA indicated that there were no cases of market abuse in the EU ETS. A new full study is expected in early 2022. Finally, ongoing tensions in the TTF market, with much speculation around the “start of pumping” date of Nord Stream 2 or Russia-Ukraine tensions affecting existing flows continue to be supporting factors for the entitlement.
All this leaves us with a scenario never seen before in the allowance market, with the US setting records almost daily, and which seems to be in a limitless upward spiral pressured by political and energy factors. The big question is when this will stabilise and in what price ranges this will occur.