The Russian invasion of Ukraine roiled financial markets across the world, and the European carbon credit market was no exception. As the price of oil surged, carbon credit prices plummeted.
After the invasion, the European Union Allowance (EUA) crashed, going from €95 per metric tonne to €55/t in five days, a 35% drop in value, according to Refinitiv.
The initial steep price drop was most likely due to the liquidation of EUA positions to cover margin calls due to fast-rising energy prices, according to Ingvild Sorhus, Lead EU Carbon Analyst at Refinitiv.
Carbon pricing is the foundation of the EU’s climate policy to curb carbon emissions across high-energy sectors — part of its Fit-for-55 package, which aims to reduce those emissions by 55% by 2030.
“The excessive downward move seemed to be a bit overdone, but it seemed little willingness to stop the ‘falling knife’, also surprising to participants that even what is seen to be strong technical level, 200-day moving average did not provide any support at all. The downward move stopped at €55/t,” said Sorhus.
It has since recovered to around €80/t.
There were multiple factors for the snowball effect down.
“In theory, the more companies need to pay for their emissions as the price of CO2 rises, the more effort they will put into cutting emissions. But all of that has changed with Russia’s invasion of Ukraine,” wrote ING researchers in a note this week to investors.
“At first sight, this fall is quite surprising given that carbon is theoretically correlated to the energy complex. The decline is in complete contrast to the move seen in gas prices.”
ING researchers cited three reasons behind the fall:
• Liquidity needs, as investors trim their EUA positions to cover losses in other asset classes and/or access liquidity for more expensive gas and electricity.
• Anticipation of lower demand, as the war causes some industries to reduce operations, thereby lowering their emissions, and
• Technical trading, with stop-losses being triggered and more automatic selling of positions as the market has dipped.
While the EUA market has recovered some already, it could continue to push higher, as countries consider burning more coal to substitute for higher-priced gas. Coal-burning increases CO2 emissions, and consequently the need for credits. Coal demand and prices have surged dramatically since the invasion.
EU carbon allowances trading last year set records, driven by both new policies and power generation. Last year, for the first time, 15.2 billion EU Allowances (EUA) were traded on ICE, the leading market for EUAs, each of which entitles polluters to emit one metric ton (mt) of CO2, according to IHS Markit.
But there is still strong evidence that the demand for carbon credits will lose some steam during the war, especially given the prospects of recession.
“You can anticipate that in times of protracted war people are going to try to conserve more energy, use less gas, particularly Russian gas, use as much renewables 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 Environment.
While the war has certainly pulled media attention away from the fight to slow climate change, Cameron said he believes it will actually accelerate more aggressive action to produce and utilize clean energy in the near term.
“You’ll see the EU come out with a big, big commitment to do more faster. It’s perfectly natural for human society to respond to the immediate threat, like war on your doorstep,” admitted Cameron. “The climate change issue is a huge dispersed distributed problem that can’t be fixed in a hurry. It will be harder to resolve when your energies are focused on war, but there is solid sensible common ground, and it lies in secure energy, not energy dependent on supply chains.