2023 Outlook For EUA Futures

Are European Allowance (EUA) Futures on the brink of a bullish breakout in 2023?

1. Brief Carbon Outlook For 2023

2. EU Allowance (EUA) Futures

   1. Overview

   2. Supply Analysis 2023

   3. Demand Analysis 2023

   4. Europe’s Challenges

3. Conclusion

Check out our website article here, and our carbon pricing dashboard.

Brief Carbon Outlook For 2023

As we look towards 2023, the outlook for carbon markets remains promising. With policy clarification and tightening carbon allowance supplies, the price of carbon allowances may increase. This is particularly noteworthy as the global blended price of carbon is still well below universal estimates. Despite this, global markets continue to expand, with new initiatives being launched in Washington state and Pennsylvania and North Carolina moving towards joining the Regional Greenhouse Gas Initiative Program (RGGI). Both Australia and China are also making progress in building their own emissions trading systems (ETS).

One key advantage for carbon markets in 2023 is their continued low correlation with other asset classes, providing a level of diversification that can enhance portfolio performance. Additionally, carbon markets can see constructive tailwinds in risk-off markets, supported by strong policy, while in risk-on environments, they can be more aggressive, potentially leading to accelerating performance. This asymmetric upside potential makes carbon markets an attractive opportunity for investors who are looking for a way to diversify their portfolios and hedge against climate-related risks. However, as with any investment, careful analysis and monitoring of market trends will be essential to maximize returns and manage risks.

EU Allowance (EUA) Futures

Overview

EU Allowance (EUA) futures have displayed strong performance, increasing by over 20% in the last quarter of 2022, following positive policy developments and new emissions reduction targets. Despite experiencing fluctuations and starting below €70 levels, the year ended with EUAs at €83.97, with the majority of trading concentrated within the €75 to €85 range.

Supply

Looking forward to 2023, EUA supply will continue to decrease, with an accelerated cap reduction factor of 4% and the MSR's 24% intake rate remaining. The accelerated cap reduction factor of 4% refers to the annual decline in the total number of EU allowances in circulation, which is faster than the previously planned 2.2% decline.

This implies that the number of allowances available will decrease more quickly, reducing the supply in the market. This reduction in supply will lead to higher prices if demand remains constant, which is good news for holders of EUA futures. Meanwhile, the Market Stability Reserve (MSR) will continue to intake 24% of the surplus allowances, which aims to increase the flexibility of the supply side of the market, preventing sudden price shocks. By removing surplus allowances from the market, the MSR will decrease the overall supply, which is likely to further support prices in the long run. Together, the accelerated cap reduction factor and the MSR's 24% intake rate create a positive outlook for EUA futures in 2023 by decreasing the supply, ultimately increasing prices and creating a more stable market.