By Frank O. Brannvoll, Brannvoll ApS, Denmark
After reaching a new all-time high of EUR99.40 just below the magic EUR100, the carbon market has lost 33 per cent, falling to EUR66. Speculators have left the market due to fear of potential intervention as EU member states have looked at capping carbon or suspending the market. Furthermore, traders have closed positions to pay for margin calls in the power and gas markets.
Fundamentally auctions are now offering 42m EUAs, up from 20m EUA, putting severe pressure on the less liquid markets.
The increased use of coal and even diesel, putting green thinking a little on hold, has given an increased demand, which we saw in August. Now fear of demand destruction from early 2023 has seen selling of EUAs bought when production forecasts were higher, and when actual production is lower, the EUAs are sold to generate cash needed to pay for higher energy prices.
The EUA December 2022 price fell to EUR66 and is now testing support in the range of EUR65-90, which has prevailed since start of the year.
EUA front-year contract, November 2020-September 2022
While these may be off the table depending on the emergency measures to be introduced by the EU, the main elements to be discussed in the European Council for fourth quarter remain:
• increase in the linear reduction factor (LRF) to 4.2 from 2.2 per cent from 2024
• reduction of 177m allowances in 2024
• keep the Market Stability Reserve (MSR) intake at 24 per cent, not reducing it to 12 per cent in 2024
• phase out free allowances by introducing the carbon border adjustment mechanism (CBAM) between 2026-35.
For 2022 Brannvoll ApS forecasts a trading range of EUR65-100, with an average of EUR80.
