Busy months ahead for the carbon market participants

2020-03-25 00:00

Although Switzerland delayed the compliance deadline for its installations, the European Commission didn't do so until now. Companies therefore prepare for a normal compliance period ahead with verified emissions reported by the end of March and allowances to be surrendered by the end of April.

To comply with the EU ETS Directive, the European member states have to distribute the 2020 free allocation until the end of February. This year, the UK will allocate two years’ allowances. Once the free allocation on their accounts, installations might be less active with EUA purchases and the demand for allowances might decrease. Some installations in a desperate need of cash might even sell (some) of their 2020 allowances. Due to a special point in the regulation, however, we do not expect many companies using their 2020 allowances now. While installations can use their free allocation for the current year to comply for the previous year’s emissions within a phase (so called borrowing), this opportunity is not available between phases. 2021 will be the first year of Phase 4 and the allowances received in February 2021 can be only used to comply for Phase 4 emissions. In April 2021, however, the companies still have to comply for their 2020 emissions, the last year of Phase 3 without having the opportunity of borrowing.
 
2019 verified emissions have to be reported until the end of March and the companies in the ETS have to surrender the equivalent amount of allowances until the end of April. The faster than expected decarbonisation of the European utilities might result in a significant decline in the emissions. Gas prices fell sharply in 2019 as supply increased (mainly thanks to LNG deliveries), while demand remained low as reserves were at record levels and 2019 was the second hottest year on record. Other part of the fossil fuel capacities has been replaced by renewables, The coal exit policies of the governments also played an important role in the decarbonisation of the European electricity production.
Industrial installations were also less active in the carbon market last year as the economy slowed down due to the conflict between the US and China that redirected Chinese exports towards Europe reducing domestic industrial emissions.
 
In the first half of the month, European lawmakers will debate the proposal of the European Commission about the new Climate Law that provides the framework for the 2050 climate neutrality. The European Commission is expected to raise the EU’s  2030 emission reduction target to 50-55% from the current 40% compared to 1990 levels. The Commission might also set interim targets for 2040. A leaked document showed that from 2030 the emission reduction target might be redefined every fifth year. A higher emission reduction target might have a direct e
 
Despite the above factors that most probably could have a positive effect on the carbon price (compliance period, no borrowing from 2020 allocation, MSR absorbing surplus allowances) the question of the month remains how fast the world can halt the spread of the coronavirus. In China, where the virus emerged before Christmas, emissions fell by a quarter as factories closed and energy demand declined. In Europe, some factories closed in Italy’s most affected Nordic region and airlines cancelled flights because of the low demand. If China does not restart factories soon, there might be disruptions in the European supply chains as well. The latest purchasing manager indices did still not reflect the effects of the coronavirus, but if Europe has to face a prolonged battle against the virus, it could cut GDP in the first half of the year. On the positive side, all central banks including the ECB emphasised that they would apply relevant measures to tackle the negative impacts of the virus. All in all, however the virus remains a black swan for the economy at the moment.

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Szánthó, Péter - HU
Falguera, Marc - ES
Belinchón, Verónica - ES
Blanke, Marco - DE
Bujacz, Tomasz - PL
Wilamowski, Bartosz - PL
Verger, Guillaume - FR
José M. García Berrendero - ES, PT
Kolaciova, Katerina - Aviation, CZ, SK
Abajas, Africa - Aviation
Gordziel, Christian - DE
Manea, Florentina - RO
Härmatis, Alexandra - SE, NO, DK

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