Carbon Emissions Collapse: Who Blinks First?

 

Carbon Emissions Collapse: Who Blinks First?

 

EUAs suffered their biggest ever one-day fall in absolute terms with the EUA DEC 22 trading at €58.00/tn today, down about 30% in just two days, alongside TTF (Dutch gas futures) which hit a 2022 (and a 2021) high of 182EUR/MWh.

 

Companies rushed for the exit amid suspected selling by Russian investors, triggering a rush of stop-losses being executed, and concerns that the ETS may be overshadowed by events in Ukraine and cease to be an immediate priority for the political bloc.

 

European companies have already started to make moves to exclude Russian crudes from their supply chains, adding further bullish momentum to the market and sustaining crude prices above the $100 mark. With many companies across the continent still struggling from the high gas prices, a political priority may force the European Commission to prioritise stabilising these prices and relieving pressure in the carbon markets, rather than risking even higher prices off the back of the conflict.

 

Looking in more detail at the EUA market speculators, their liquidation of positions has made put option sellers hedge themselves and the call option sellers unwind their hedges, which has overpowered the high gas prices and increased demand for allowances to offset other forms of more polluting energy production and driven carbon prices lower.

 

It is difficult to understand the speed of the selloff other than general risk-off trading initiated by the Russia-Ukraine conflict. Spiking energy prices have also renewed concerns of intervention in the EU ETS and the war has cast doubt over Europe’s determination to decarbonise.

 

The reasoning behind Russian investors offloading positions was out of protection from possible sanctions and loss of access to Western financial markets, though some believe that this sudden selling action was temporary and likely to subside in the coming days unless there is further escalation in the conflict.

 

Half of Russia’s revenue comes from oil and gas, with oil making up just over a third of sale profits. According to the country’s central bank, Russia’s total exports reached $489.8 billion in 2021. Crude oil sales accounted for $110.2 billion of that amount, oil products for $68.7 billion, pipeline natural gas $54.2 billion, and liquefied natural gas $7.6 billion. This is obviously a significant industry for Russia and a potential target for those looking to economically damage Russia to force an end to the conflict.

 

The question that is being asked is who will blink first? Will Russia risk an escalation of the conflict and further sanctions potentially to its major export oil, or will this period now mark a de-escalation and a return to the northwards trajectory of the European carbon market?