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EUAs vs crude oil update

Posted in Carbon markets with tags , , , , , , , , on May 28, 2010 by Dan

I’ve updated the chart of EUAs vs crude oil (see below). I’ve included some comments based on an incomplete understanding of the dynamic between the two, so any comments would be gratefully received.

For the past year, EUAs have been rangebound between 12 and 16 euros. Oil, conversely, has trended strongly upward from $63 (EUR45) a year ago to a high of $80 (EUR63) a week ago. This is in contrast to the first period shown on the graph, between Jan 2007 and Spring 2009, where EUAs and crude were strongly correlated.

The relationship between EUAs and crude oil is partly that both are driven by overall demand for energy, but this changes over the long-term. The relationship observable in this graph is more likely driven by the ‘dark-spark’ mix of energy production in Europe. This refers to the mix of coal (dark) and gas (spark) in energy generation. Oil prices tend to drive the price of natural gas, which is clean relative to coal. When oil increases in price, energy generators switch to coal and therefore demand for carbon credits increases.

The increase in oil price over the past year would usually indicate a greater proportion of coal going into Europe’s energy supply. However, higher demand for carbon credits has not resulted. The sluggishness of EUAs in responding to oil prices is probably a reflection of poor industrial recovery following the credit crunch.

(click to expand)

Slumping EUA price makes an equity bounceback look unlikely

Posted in Carbon markets with tags , , , , , , , on January 22, 2008 by Dan

European carbon allowances are slumping alongside share prices. As the value of the FTSE 100 dropped yesterday by 5.5 per cent, EUA 2008 future prices dropped by 6.6 per cent. The price of emissions allowances continues to drop this morning, reaching a five month low of EUR 18.50.

Many traders are pointing to some of the usual drivers of the carbon price, particularly the wholesale price of energy, which has fallen over the past few weeks. That doesn’t add up at all – such a pronounced drop in the EUA price could not possibly be unrelated to a simultaneous plunge in equity markets.

It looks like the market is adjusting its view of the likely demand for carbon allowances over the next 11 months. An economic downturn means lower greenhouse gas emissions, and therefore increased supply of allowances and reduced demand. This does not make the EU ETS any less effective in reaching emissions targets – but it does reduce investment in clean technology.

This view makes an equity bounceback look unlikely. The vast majority of participants in the EUA market are EU ETS installations, meaning that they have a statutory requirement to hold a number of allowances that cover their emissions. A sell-off among these companies reflects gloomy growth prospects.

Note that carbon prices are much more volatile than share prices. A little under a year ago, the EUA 2008 price dropped below EUR 13. If the FTSE 100 was at 3000 last year, the share losses of the past few days would look quite different.