EU ETS for Shipping Emissions Sets Sail, Clean Fuel Standards in Aviation, and EU Carbon Market Dynamics

Big Changes Made: Integrating Shipping into EU ETS, Revamping Aviation Fuel Standards, and Deciphering the Volatile EU Carbon Market

Recent Trends in EUA Prices

The European Union Allowance (EUA) market has recently witnessed significant volatility, showcasing the intricate dance of market forces in play. Notably, there was a sharp 5.5% drop in EUA prices, erasing half of the gains accrued in the last two weeks of December. This decline, closing the EUA Dec.24 at €75.96 per ton, can be largely attributed to a strategic maneuver by investors.

Factors Influencing the Downward Trend

Several factors contributed to this downward movement:

1. Rebuilding of Short Positions: Investors were actively rebuilding their short positions after significant short-covering witnessed in late December. This shift in investment strategy played a crucial role in the price drop.

2. Profit-Taking by Short-Term Traders: The end-of-year rebound offered lucrative opportunities for short-term traders to capitalize on. Their profit-taking activities, against the backdrop of a still weak fundamental picture, contributed to the downward price movement.

3. Exaggerated Drop: Despite the fall, market analysts deemed the decrease somewhat exaggerated. This perspective stems from expectations of higher residual power demand in the upcoming weeks, coupled with a lack of auction supply until mid-January.

Market Volatility and Influencing Factors

The EUA market is currently experiencing enhanced volatility due to several factors:

• Absence of Primary Supply: The hiatus in auction supply until mid-January has introduced an element of uncertainty in the market.

• First Real Cold Spell of the Year: The onset of colder weather is impacting energy demand and consequently affecting EUA prices.

• Normalized Demand Still Low: Despite these factors, the normalized demand (corrected for temperature effects) remains below average. This suggests that the market is not as robust as the cold weather spike might imply.

Macro-Economic Considerations and Future Outlook

Looking at the broader economic landscape, signals continue to point toward a contraction in industrial activity. This macro-economic context is essential for understanding the potential future movements in the EUA market.

• Resumption of Auctions: The upcoming resumption of auctions on January 15th could reintroduce pressure on carbon prices. Market participants are keenly awaiting this date, anticipating its potential impact.

• Market Consensus on Price Justification: The current market consensus appears to hover around the belief that fundamental factors do not justify EUA prices exceeding €80 per ton.

• Shift in Compliance Deadline: A notable change in the market dynamics is the absence of the usual support in the first quarter of the year. This shift is due to the compliance deadline moving to September under the Fit for 55 reforms, altering the traditional market rhythm.