EUA Emissions Breakout, Upside target 75Strong technical reversal and tailwinds from European Fiscal Expansion as well as tightening fundamentals from Carbon Price adjustment mechanism and inclusion of maritime in European Emissions Scheme.
ECFH2028 trade ideas
A Golden Cross for EUA FuturesEuropean Union Carbon Allowances (EUAs) rose close to 19% in the past month (16/01/2023-15/02/2023). In its quarterly publication released on Monday 13th February 2023, the European Commission revised upwards its economic growth forecast for the Eurozone to 0.9% in 2023 from 0.3% previously. Moreover, it expects the trading block to avoid recession. With the European Union on a healthier footing than previously assumed, market participants are more optimistic and hence have upgraded their expectations on carbon allowance demand. The compliance deadline for 2022 emissions is 30th April 2023. There could be strength in demand as we approach that date.
At the same time, markets are anticipating an announcement on final decisions from trialogue discussions (between the European Council, European Commission and European Parliament) on the ‘Fit for 55’ legislative proposal package put forward in 2021. The preliminary agreement announced in December 2022 was more aggressive than the European Commission’s initial proposal on many fronts affecting the European Emissions Trading System (See summary table of some of the provisional agreements below). A tighter Linear Reduction Factor; wider scope of Carbon Border Adjustment Mechanisms; an extension of the Market Stability Reserve intake of 24% to 2030 are all positive for EUA prices. The market awaits confirmation that these will be in the final wording.
Still risks linger with the financing of REPowerEU, where the Commission had proposed monetising some of the EUAs in the Market Stability Reserve. Parliament voted on 14th February to partially accept the idea of using Allowances in the Reserve to finance REpowerEU (by taking €12bn from the European Innovation Fund and then compensating the Fund with 27 million Allowances)1. The remaining €8bn will come from front-loading planned auctions of EUAs. If the Council also approves we see this as a price negative move.
With close to a 19% gain in EUA futures prices in the past month, the market has entered a “Golden Cross” in technical analysis jargon, where the 50 day moving average (DMA) price rises above the 200 DMA. It is interpreted by technical analysts and traders as signalling a definitive upward turn in a market.
Sources:
1 Peter Liese Press Release - Overcome dependency from Russian Oil and Gas breathing speace for electricity consumers and industry
Update on European Union Emissions Trading Scheme Trialogue discussions in progress
The ‘Fit for 55’ legislative package proposed by the European Commission in the summer of 2021 is likely to be the catalyst for the most meaningful reform of the European Union Emissions Trading Scheme since the programme began in 2005. A lot of progress had been made in getting to a final agreement, with the European Parliament having concluded its debates before the summer recess and the Council of European Union (chaired by Czech Republic) finalising its position around the same time. However, discussions between the three groups (The European Commission, Council of European Union and European Parliament) on ‘Fit for 55’ legislation has been slowed by concurrent REPowerEU discussions. REPowerEU is the European Commission’s plan to make Europe independent from Russian fossil fuels well before 2030, in light of Russia's invasion of Ukraine. Both REPowerEU and Fit for 55 should promote energy transition and decarbonisation and the therefore are pace and ambition in one initiative will have implications on the other.
Trialogue discussions on the ‘Fit for 55’ legislation between The European Commission, Council of European Union and European Parliament are currently taking place. There is a lot of hope that these discussion will be concluded before Christmas, while the current chair of the Council is in place (Czech Republic).
What’s been agreed and what’s next?
So far a number of things have been agreed :
1. A lower threshold for the cost containment mechanism (Article 29a)
2. No restriction of market access to “speculators”
Provisional agreement has been reached on :
1. 40% emission reduction by 2030 from 2005 in Effort Sharing Regulation (non-ETS sectors)
2. Provisional agreement on starting the phase-in of shipping into the ETS in 2024-26, later than the 2023 as originally proposed
3. Phasing out free EUAs for the aviation industry by 25% in 2024 and 50% in 2025 and completely by 2026. A total of 5 million allowances that were allotted to aviation companies will now go into an innovation fund. Only intra-EU aviation is covered by the EU ETS. In 2026, the EU will access if the International Civil Aviation Organization’s CORSIA is doing a good enough job at decarbonising the international aviation industry. If it isn’t they will seek to include international flights into the EU ETS.
Tentative agenda for remaining discussions :
1. December 14th 2022: Carbon Border Adjustment Mechanism
2. December 16th 2022: Revision of key formulas including overall cap, linear reduction factor and expansion of ETS to buildings and road transportation
3. December 19th: Social Climate Fund
Swift agreements will be useful
As we approach the final days of the calendar year, open interest and trading volumes on EUA futures tend to decline. Important news flow on days with lower-than-normal liquidity could have an outsized effect on price. Thus, it will be prudent for the trialogues to conclude swiftly. Moreover, it will be convenient to conclude before the (rotating) Presidency of Council of Europe switches to Sweden on January 1st 2023. With center-right Prime Minister Ulf Kristersson dependent on the far-right, Euroskeptic Sweden Democrats (SD) for his parliamentary mandate, some fear EU legislative processes could be slowed. However, if key agreements are made before the switch, it will be difficult for the Council to back out in the New Year.
Article 29a reform
Under Article 29a of the current Directive, if for more than six consecutive months, the allowance price is more than three times the average price of allowances during the two preceding years, the European Commission (EC) shall convene a meeting of the Climate Change Committee. As a second condition, the EC Climate Change Committee has to determine that the excessive price fluctuations do not correspond to market fundamentals. If both conditions are met, Article 29a is triggered, whereby the EC can release an appropriate number of Allowances from the Market Stability Reserve. To date, this has never happened.
The reform agreed is to lower the threshold to 2.4 times the average price of allowances during the two preceding years rather than 3x. This is less bearish for EUA prices than lowering to 2x as we were projecting in our last blog - Suspension of EU ETS unlikely. The current Article 29a doesn’t specify how many EAUs need to be released. The EC would need to decide on an appropriate number given the scale and circumstances of the misalignment with fundamentals. The reformed Article will involve 75 million allowances released automatically. While still less than the 100 million discussed earlier this year, removing the ‘second condition’ of judging if the price movement is out of line with fundamentals may in fact drive more instability in EUA pricing.
Had this reform been in place in 2021-2022, it still would not have triggered the release of additional EUAs, during this period of heightened price volatility, although it would have come close. If implemented in 2018, Article 29a would have likely been triggered.
Are we there yet?
Not everything in the Fit for 55 package has been agreed and even what has been a greed is not yet law. Any provisional agreement reached in trilogues is informal and has therefore to be approved by the formal procedures applicable within the Council and Parliament. In Parliament, the text of the provisional agreement has to be approved by a vote in committee after which it is confirmed in plenary.
ECF CO2 Credits, Accumulation pattern?(Chart view looks weird, see image below instead)
Here's a pattern I've enjoyed emerging for the past few months. It seems to not be following the usual rules regarding support and resistance lines, which is why I missed it at first. That is likely due to the nature of these CO2 credits and the way they are traded. To me it seems pretty clear that it at least follows a classic Wyckoff Accumulation pattern to some degree. Could be a coincidence, who knows? I've been lucky so far since finding this curious wyckoff similarity. It will be very interesting to see how well it will finish the schematic. I'm trading the certificate TRACK CO2 VON (Nordic MTF) for these movements.
Progress on ‘Fit for 55’ breathes life into EUA marketOn Friday 28 October, EU carbon emission allowances (EUA) had extended their largest weekly gain in 5 years following a strong rally over the preceding six days1. This happened during a week when the first ‘Fit for 55’ proposal was agreed2. The EU has strengthened targets for CO2 emissions from road transportation.
To understand this price action, it is important to reflect on what happened in the EUA market between August and October.
EUA prices fell sharply in August after reaching an all-time high of EUR98.42/MT3. Two main things triggered the collapse in prices. First, Poland’s Prime Minister called for a suspension of the EU’s Emission Trading System (ETS) to deal with the stress of rising prices. Poland’s state-owned electricity company even launched an advertising campaign blaming the ETS for the country’s high energy prices.
Second, there had been much talk about reforming Article 29a of the EU Emissions Trading Scheme (ETS) Directive – the mechanism designed to reduce instability caused by price spikes. Despite the high price volatility of EUAs and the sharp price increases in the past two years, the clauses under Article 29a have never been invoked.
In September we outlined how the past sequence of events, that were weighing on EUA prices, were unlikely to materialise further. The suspension of ETS had neither any legal basis nor any political will. And the triggering of Article 29a is an ambiguous process and it wasn’t certain that its thresholds were likely to be hit. Even if we disregard the technicalities of Article 29a, the principle remains that the ETS Market Stability Reserve was designed to reduce the historic oversupply of EUAs and used only to counter any major shocks to the system. As a result, we took the view that markets had overreacted even though the fundamentals for EUA remained strong.
In the blog, we also suggested that post summer, we expect to see more momentum on the ‘Fit for 55’ legislative front. As per the press release by European Council from 27 October 2022: The Council and the European Parliament reached a provisional political agreement on stricter CO2 emission performance standards for new cars and vans. The goal of the agreement is to move towards zero-emission mobility.
Pending a formal adoption, the co-legislators agreed to a:
55% CO2 emission reduction target for new cars and 50% for new vans by 2030 compared to 2021 levels
100% CO2 emission reduction target for both new cars and vans by 2035.
The proposal to revise the CO2 emissions performance standards for cars and vans is part of the ‘Fit for 55’ package. Presented by the European Commission on 14 July 2021, the package aims to enable the EU to reduce its net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels and to achieve climate neutrality in 2050.
At WisdomTree, we believe this development sends a strong signal to markets that the EU is committed to the ‘Fit for 55’ package. As rules covering other sectors not currently legislated under the ETS (like buildings and shipping) are unveiled, we may see more positive price momentum in EUAs.
This does not rule out volatility in the short-term. Europe is still faced with a precarious energy situation over winter. Oil and natural gas prices can have an indirect effect on EUAs. For example, if energy supplies are ample and industrial activity continues at or close to normal levels, demand for EUAs will also stay at normal levels. If activity needs to be curtailed, emissions will automatically fall and so will the demand for EUAs.
In the medium term however, Europe’s focus remains on the energy transition. REpowerEU – the policy proposal to wean off Russian energy dependency – also focuses on speeding up the energy transition away from hydrocarbons in general. In short, the energy shock is unlikely to derail EU ETS from being the cornerstone of EU’s climate policy. The recent rally in EUA prices appears to be a realisation of this from markets.
1 Source: Bloomberg.
3 On 19 August 2022, source: Bloomberg.
Ascending Trianglesmall figure of daily continuation, ascending triangle
with only 4 (maybe 5 ??) points of contact
R / R 3
entry 0.33%
BULLISH ON CARBONBullish clues:
- Strong uptrend : x4 in 1 year
- Symmetrical triangle , a continuation pattern
- Above the neutrality zone on the Relative Strength Index (RSI > 50) , with a strong support
- The 40 Exponential Moving Average is a good support
- Stay above the 70% retracement zone
Objective:
My first objective is €89, the last swing high, reached on January 5, 2022.
The second one is €91, the all time high, reached on December 8, 2021.
The third one is the theoretical objective of the symmetrical triangle, at €104.
Feel free to share, comment and give your opinion if it is constructive ;)
DISCLAIMER: This is not investment advice
NETZ vs Carbon Preise auf dem VCMNETZ vs Carbon Preise auf dem VCM
NETZ vs Carbon Preise auf dem VCM
NETZ vs Carbon Prices on Voluntary marketNETZ (Carbon Streaming Corp) vs Carbon Prices on Voluntary market
EUA: We have a floorFuture EconMin Habeck just put a floor under EUAs (and energy in general). CO2 futures should not drop below €60.
CrazyHello again to my "Crazy Edition". EUA carbon futures up 370% since the beginning of the year and with new record highs today. Talk about (not so) "transitory" inflation.
testhow exactly does this work? how exactly does this work?how exactly does this work?how exactly does this work?how exactly does this work?how exactly does this work?how exactly does this work?
Carbon could test €30 in the short-termCarbon (EUA) is a very technical market, as you can tell from my previous charts. Dec20 contract breached a strong resistance level and it could aim for €30/t. Additional support has been felt by fundamentals and Brexit developments.
In the short-term, the market could be bullish and attempt to set a new trading range, above the €26/t. That said, I doubt EUAs will remain bullish until 31st of October (Brexit new deadline). Strongly believe volatility will remain quite high due to several upcoming data announcements - later in the summer and in September.
A
Carbon outlook changes to bearishHello folks,
A number of fundamental changes have affected EU ETS allowances, which are currently breaching MA200 - a strong technical level.
Weak EUETS auctions, low/negative dark spreads and Brexit concerns have provided pressure. Technically, Fibonacci 61%(used for resistance levels), and MA200 have been breached. All technicals, except RSI (which is not my favorite in trending markets), show further bearishness.
Happy to hear your thoughts!
Peace
A
Carbon - Technical analysis - A correction in the horizon?Heya,
In the previous post, I shared with you an ambitious thought, which was predominantly based on a fundamental view rather than a technical view. Hence, I set a tight stop-loss.
Now, we see carbon testing some support levels, which I'm not confident it can breach in the short-term. That said, Brexit developments next week may provide some further direction. In the meantime, speculators have increased long positions and some profit talking could help carbon to retrace some of its recent gains. Volatility is expected to remain quite high.
Entering a short position with a tight stoploss around current levels seems a positive EV move with a decent risk-reward ratio.
All thoughts are written down so I keep track of my thoughts and are for educational purposes.
Would love to hear your comments.
Peace,
A
Carbon EU ETS EUA Carbon as a market has been following very closely technical signs in 2018. European Commision introduced Market Stability Reserve (MSR) a policy that aims to reduce the surplus of carbon allowances we are currently seeing in this market.
This analysis argues that EUAs tested the 21.40 three times but failed to breach it. That said, the triple top formation never occurred and therefore an inverse head and shoulders have provided the necessary upward pressure. Technically this market could test in the short-term its recent high.
Fundamentally, MSR kicks in next year and traders will be looking very closely to see how this instrument will affect this market. The demand of those allowances will play the most important role.
All these are just my thoughts and observations for education purposes. This is not an investment advice.
Happy to hear yours.
L
Tight consolidationEUA CO2 consolidating in a very tight manner, expecting prices to resolve higher.
