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

Europe’s energy crisis is now largely abated, with a decision due 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 KraneShares, in a recent article, provided guidance on what all the changes mean for the EU carbon allowances market, as well as a look at recent EU allowance implementation.

The EU’s winter reserve is currently around 95% of capacity in mid-November following the implementation of European policies this year, which led to a reduction in seasonal demand, diversification of energy supply sources and the creation of minimum reserve reserve obligation standards. Gas prices, which were at historic highs in the summer, have since declined since the crisis subsided, falling by about two-thirds of their summer highs.

Russia’s invasion of Ukraine earlier this year and its ongoing war are having a long-term impact on the macroeconomic environment, with inflationary pressures weighing on stocks, fueling fears of a recession and reducing industrial output. Carbon stocks aren’t quite as correlated, but this year’s macro trends are global market volatility and uncertainty.

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“However, stock performance is currently better than expected, while Gross Domestic Product (GDP) remains significantly positive. This sentiment was reflected in European stock markets, with the EuroStoxx50 up ~16% over the past six weeks.,” Oliver explained. “Policy reforms and market tightening measures also offer strong structural support for its future [EUA] program and its ability to withstand a mixed macro environment.

Performance of the EU Carbon Market and the Potential Impact of RePowerEU

EU Carbon Allowances (EUAs) have been hovering around or bumping against the €80 ($83) range for most of the year and have recently retreated to the €70 mid-range or moved above €80-90 ($83). . -93) from April to September of this year.

“This price action pattern may continue until new positions are reestablished at higher levels as the market digests some recent positive signals and takes a clearer view of the key regulatory issues of the moment,” Oliver wrote.

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The RePowerEU plan, launched by the European Commission earlier this year, is working to create a framework for reducing dependence on Russian fossil fuels. At the height of Europe’s energy crisis, proposals included selling EUAs from the market stability reserve (MSR) to help finance the transition, a move that could reduce the validity of MSRs and lower EUA prices. The MSR was created as a tool to prevent price volatility in the allowance market with the ability to release or withhold allowances.

“At this month’s plenary session, the Parliament is set to finalize its position on the possible loading of EUAs from future auctions, a materially more constructive solution than entering the MSR. Meanwhile, the Council of the European Union is proposing a hybrid approach of 25% from front-loading and provided 75% of the Innovation Fund,” said Oliver.

Image source: KraneShares

Lead EUAs will come from auctions planned between 2027-2030, which will increase financing capacity in the short term without bloating the system in the long term. According to Bloomberg New Energy Finance, depending on which resolution is voted on, EUA prices can vary by up to 23%.

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Carbon market investment opportunities in the EU with KEUA

“With carbon analysts at the recent Carbon Forward conference in London projecting an average EUA price of 80 euros ($83) by the end of 2022, and clarity returning to supply and demand dynamics, we are watching closely for a move above this level,” he said. Oliver.

In KraneShares European Carbon ETF (KEUA) a targeted offer to the EU carbon credits market is proposed and actively managed.

The fund’s benchmark is the IHS Markit EUA Carbon Index, an index that tracks the most traded EUA futures contracts, the oldest and most liquid market for carbon credits. The market currently covers around 40% of all EU emissions, including the 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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