PRESS ROOM
Which way will regulation pull EUA prices?
Thursday 06th October '22
European Union carbon Allowances (EUAs) fell 17% in September. That marks the worst monthly decline since March 2020 i.e., at the depth of the COVID crisis. We don't think such pessimism is justified. Economic activity, while likely to decline, is unlikely to be as negative as we saw in the months of shutdowns in 2020. Also, the EU Parliament is likely to vote against the proposal by the European Commission to raid the Market Stability Reserve (MSR) to fund REPowerEU. As we commented on in Is the EU ‘shooting from the hip’ by raiding the Market Stability Reserve?, tapping the MSR would not only increase the supply of EUAs, but would send a negative signal about the EU’s resolve to control excess supply and make market participants fearful of excessive and ad-hoc policy interference. Parliament’s decision to reject the proposal we believe should reverse the price declines that came in June 2022 when the Commission put the proposal forward. Parliament and the Council (chaired by the Czech Republic) instead favour front-loading sales of EUAs member countries had planned to sell between now and 2030. We believe as aggregate supply does not change in this revised proposal, the plan should not be price negative. If prices do decline in response to the front-loading, that should open an even better entry point.