Ukraine invasion drives down carbon credit prices

A woman on bicycle rides passes the power station in Neurath, Germany.

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The Russian invasion of Ukraine rocked financial markets around the world, and the European carbon credit market was no exception. As the price of oil soared, the prices of carbon credits fell.

After the invasion, the European Union (EUA) allocation crashed from €95 per metric ton to €55/t in five days, a 35% drop in value, according to Refinitiv.

The initial sharp drop in prices was most likely due to the liquidation of EUA positions to cover margin calls due to rapidly rising energy prices, according to Ingvild Sorhus, Lead EU Carbon Analyst at Refinitiv.

Carbon pricing is the bedrock of EU climate policy to cut carbon emissions in high-energy sectors – under its Fit-for-55 program, which aims to reduce such emissions by 55% by 2030.

“The excessive downward movement seemed a bit exaggerated, but it seemed unwilling to stop the ‘falling knife’, which also surprised participants that even what is considered a high technical level, the 200 moving average days did not provide any support. The downward move stopped at €55/t,” Sorhus said.

It has since recovered to around €80/t.

There were several factors for the downward snowball effect.

“In theory, the more companies have to pay for their emissions as the price of CO2 rises, the more effort they will put into reducing emissions. But that all changed with Russia’s invasion of Ukraine,” wrote the ING researchers in a note. week to investors.

“At first glance, this drop is quite surprising given that carbon is theoretically correlated to the energy complex. The drop is in complete contrast to the evolution of gas prices.”

ING researchers cited three reasons behind the fall:

  • Liquidity needs, as investors reduce their EUA positions to cover losses in other asset classes and/or access liquidity for more expensive gas and electricity.
  • Anticipation of a drop in demand, as the war forces certain industries to reduce their operations, thus reducing their emissions, and
  • Technical trading, with stop-loss triggering and more automatic selling of positions when the market has fallen.

Although the EUA market has already recovered some of this, it could continue to push higher as countries consider burning more coal to replace more expensive gas. Burning coal increases CO2 emissions and therefore the need for credits. Demand and prices for coal have increased dramatically since the invasion.

Last year, EU carbon trading set records, thanks to both new policies and power generation. Last year, for the first time, 15.2 billion European allowances (EUAs) were traded on ICE, the main market in the EUAs, each entitling polluters to emit one metric ton (mt) of CO2, according to IHS Markit.

But there is still strong evidence that demand for carbon credits will falter during the war, especially given the prospect of recession.

“You can anticipate that in times of protracted war people will try to conserve more energy, use less gas, especially Russian gas, use as much renewable energy as possible and there is a risk that high inflation and stagnant wages could lead to recession,” said James Cameron, a carbon markets expert at Yale University’s Center for Business and the Environment.

While the war has certainly diverted media attention from the fight to slow climate change, Cameron said he believes it will actually accelerate more aggressive action to produce and use clean energy in the near term.

“You’ll see the EU come out with a big, big commitment to move faster. It’s perfectly natural for human society to respond to the immediate threat, like war on your doorstep,” Cameron admitted. “The problem of climate change is a huge, dispersed and distributed problem that cannot be solved in a hurry. It will be harder to solve when your energies are focused on war, but there is solid common ground that makes sense, and it resides in secure energy, not dependent on energy from supply chains.

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