An Advisor’s Guide to the EU Carbon Market With KraneShares

Europe’s energy crisis is largely abated for now and a decision will be made within the next month on the RePowerEU initiative to wean Europe off its dependence on Russian fossil fuels. Luke Oliver, Managing Director, Head of Climate Investment, and Head of Strategy at Craneshare, in a recent paper looks at what all the changes mean for the EU’s carbon allowances market as well as mid-month guidance looking at the performance of EU allowances recently.

Winter stocks for the EU are currently at around 95% capacity as of mid-November after Europe implemented policies this year to reduce seasonal demand, diversify energy supply sources and create minimum storage inventory obligation standards. Gas prices, which were at historic highs in the summer, have since fallen to about two-thirds of their summer highs as the crisis eased.

Russia’s invasion of Ukraine earlier in the year and its ongoing war continue to have long-term effects on the macro environment, with inflationary pressures weighing on stocks and fears of a recession, and industrial production falling. Carbon allowances are largely uncorrelated but subject to macro trends this year of global market volatility and uncertainty.

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“However, equity indices are currently holding up better than expected, while gross domestic product (GDP) remains largely positive. This sentiment was reflected in European equity markets, with the EuroStoxx50 rallying ~16% over the past six weeksOliver clarified. “Policy reforms and market tightening measures also provide strong structural support for the future [EUA] Program and ability to weather mixed macro environment.

EU Carbon Market Performance and Potential RePowerEU Impacts

EU Carbon Allowances (EUAs) have hovered around the €80 ($83) support/resistance band for several years, either bumping up against it and recently retreating to the mid-€70s or hovering above the €80-90 ($83) range. doing -93) from April to September this year.

“This price action pattern may continue until new positions are reestablished at higher levels as the market absorbs some of the recent positive signals and establishes a clearer view of key regulatory matters currently being discussed,” Oliver wrote.

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The RePowerEU plan, presented by the European Commission earlier this year, works to create a framework to eliminate dependence on Russian fossil fuels. At the height of the energy crisis in Europe, there were proposals to sell EUAs from the Market Stability Reserve (MSR) to help fund the transition, a move that could undermine the validity of the MSR and lower EUA prices. The MSR allowance was created as a means to hedge price volatility with the ability to issue or hold allowances in the market.

“In this month’s plenary session, the Parliament is set to finalize its position, which will likely advance the EUA from future auctions, a materially more creative solution than tapping into the MSR. Meanwhile, the EU Council has proposed 25% of resources from frontloading and 75% from the Innovation Fund. offered a hybrid approach,” Oliver explained.

Image source: KraneShares

Frontloaded EUAs will be brought forward through scheduled auctions between 2027-2030, increasing financing capacities in the short term without unnecessarily bloating the system in the long term. Depending on which resolution is voted on, EUA prices could vary by up to 23%, according to Bloomberg New Energy Finance.

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Investment opportunity with EU carbon market KEUA

“Carbon analysts at the recent Carbon Forward conference in London released an average forecast price of €80 ($83) for EUAs until the end of 2022, and with clarity returning to supply and demand dynamics, we are closely watching for a break out above this level,” Oliver said.

The KraneShares European Carbon Allowance ETF (KEUA) Provides targeted exposure to the EU carbon allowance market and is actively managed.

The fund’s benchmark is the IHS Markit Carbon EUA Index, an index that tracks the most traded EUA futures contracts, the oldest and most liquid market for carbon allowances. The market currently provides coverage of around 40% of all emissions from the EU, including 27 member states and Norway, Iceland and Liechtenstein.

KEUA has an expense ratio of 0.78%.

For more news, information and strategy, visit the Climate Insights channel.


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