During a commodities slump caused by global economic concerns, one market stands out for its resilience: EU carbon allowances. While other commodities like oil and coal have experienced significant price declines, EUA prices have surged from below €5 in mid-2014 to over €8. This exceptional performance raises the question of why carbon markets are thriving while others suffer.
The answer lies in political intervention on an unprecedented scale. European Union politicians have recognized carbon trading as the most cost-effective method to combat greenhouse gas emissions. However, the market was plagued by oversupply and the use of international offsets, which hindered the long-term price signal necessary for the required investments. To address this, short-term measures like backloading, and reducing auction supply in 2014-2016, were implemented.
Significant progress was made last week with the passage of the Market Stability Reserve (MSR), which will be effective in 2019. This reform will eliminate the surplus allowances, effectively eradicating oversupply. These measures alone have fuelled price forecasts that indicate a steady rise from 2015 to 2030. In anticipation of the future impact of the MSR, companies are now less willing to sell off their surpluses, opting to save excess allowances for future use. On the other hand, proactive companies are purchasing more allowances than they currently need.
Furthermore, the recently released EU ETS Phase 4 proposals (2021-2030) aim to tighten the cap and realign free allowance allocation, placing additional pressure on companies and resulting in a significant increase in carbon costs. As a result, the price of carbon not only defies the current market downturn but is expected to outperform during the next uptrend as well.
The unique political interventions and market reforms have positioned carbon markets as a bright spot amidst the commodities slump, providing optimism for the future of emissions reduction efforts.
