CO2 Market

Stronger than expected performance at the end of August

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The EUA Dec 20 benchmark contract appreciated by 9.1% in August in a monthly comparison.
During the first three weeks of August, the price oscillated between 24.90 euros and 27.50 euros mainly driven by the EUA primary market auctions’ direction before testing the 30 euros level during the last week of the month.
During this week, the price was range bound between 25.80 euros and 30.16 euros.
The increased volatility was driven by compliance entities returning from their holidays, but also by an article in the Financial Times stipulating that the European carbon market is a popular bet among speculators.
European gas prices started increasing as well on unexpected outages in the north of the continent and on increasing opposition against the Nord Stream 2 pipeline after the poisoning of the leader of the Russian opposition.
The front year TTF gas contract jumped by 16.3% in a monthly comparison.
Bird-wing shaped economic recovery instead of V-shaped
Towards the end of August, Italy estimated its Q2-20 GDP contraction to be at 12.8%, which is higher than previously forecasted.
The Bank of France announced in mid-August that the bloc is going through a rather bird-wing shaped economic recovery than a v-shaped one.

On the Green Deal front
The bloc has seen almost no changes on the Green Deal front as the market awaits the September release of the European Commission’s impact assessment about raising the EU’s 2030 emissions reduction target from the current 40% to 50-55%.
In the beginning of August though, the Russian Union of Industry and Entrepreneurship kicked off conversations with the EU on the carbon border adjustment mechanism (CBAM) and its effect on the Russian products’ competitiveness. Official negotiations start in September.
On the same front, the EU trade chief Phil Hogan, one of the members of the European Commission in charge of designing the bloc’s CBAM, resigned at the end of the month over the uproar that he breached Covid-19 rules.

A volatile autumn expected in the European Emissions Trading System
Auctions will return to normal in September with an almost 50 million increase in the offered volume. It has to be seen, if the new restrictions reduce emissions of the compliance entities in the second half of the year or if there is enough demand for the allowances auctioned.
Some market participants are thinking ahead already knowing that the availability of phase 3 allowances, the only type that is eligible for 2020 compliance will be limited after the end of the year. From 1 January 2021, only phase 4 allowances will be issued by the member states that can be used to cover emissions from 2021.
Installations receiving free allocation were also shocked by a leaked draft from the European Commission that showed that phase 4 free allocation to producers of refinery products, coke, iron casting, lime, ammonia, and pulp and paper products would be cut by 24% compared to phase 3. Other industrials would see a smaller reduction of 3% in their free allocation.
The Parliament’s environment committee will vote on the EU’s climate law, as proposed by the Commission in March, including how the EU can achieve climate neutrality by 2050. It is likely to be voted on by all MEPs during a plenary session in October. Political decisions can increase the volatility of the carbon price further in the last months of the year.