Global Carbon Update
Analyzing the Fluctuations and Regulatory Shifts in Carbon Markets from Europe to the Americas
In the dynamic world of carbon trading, the last week has been marked by significant movements across different markets. European Union Allowances (EUAs) and UK Allowances (UKAs) have experienced notable fluctuations, while the Californian Carbon Allowance (CCA), Regional Greenhouse Gas Initiative (RGGI), and Western Climate Initiative (WCI) markets also witnessed pivotal changes. These movements come amidst a backdrop of regulatory shifts and geopolitical developments, influencing investor sentiments and market strategies.
European Union Allowances (EUAs)
The EUA market observed a 3.03% decrease in weekly average prices, from €75.75 to €73.45. This downtrend aligns with the broader market sentiment, which anticipates a continued bearish outlook with prices expected to hover between €71.12 and €73.23 in the coming weeks. Contributing to this sentiment, the European Securities and Markets Authority (ESMA) reported a notable increase in open interest for EUA futures at both ICE Endex (5.90%) and EEX (1.35%) from 10th to 24th November 2023. However, EUAs weakened at the start of the week, shedding nearly 3% under renewed selling pressure, exacerbated by falling gas prices and milder weather forecasts.
UK Allowances (UKAs)
In the UK, the average benchmark price for UKAs witnessed a 6.50% decline, from £44.18 to £41.31 over the last week. ICE Futures Europe reported a mild increase in UKA open interest, from 56.46 million to 56.57 million, between 17th and 24th November 2023. The European Commission's plans to monitor carbon leakage concerning the maritime sector's inclusion in the EU ETS is a crucial development, potentially impacting future market dynamics.
Californian Carbon Allowance (CCA)
The CCA market saw the V23 Front closing at $38.85, a modest 0.36% gain over the week. The weekly volume increased by 21.97% to 85.02 million, with the 4-week moving average at 53.75 million tons. CFTC data revealed a decrease in open interest by 2.38 million tons, though compliance entities and managed money showed an increase in long positions. CARB's anticipated cap-and-trade program amendments and the Department of Energy's (DOE) revelation of massive lithium reserves in California’s Salton Sea are pivotal developments, likely to influence future market trends.
Regional Greenhouse Gas Initiative (RGGI)
The RGGI market, too, saw activity with the ICE RGGI V23 Front closing at $14.88, a 0.68% increase. The weekly volume surged by 112.7% to 15.91 million tons. However, open interest decreased, with compliance entities reducing and managed money increasing long positions. The upcoming Auction 62 and the ongoing legal challenges in Pennsylvania are key events to watch.
Western Climate Initiative (WCI)
The WCI market observed a slight decrease in WCAs, closing the week at $54.87, a 1.83% dip from the previous week. Trading volumes saw a 40% decline WoW. The upcoming Washington auction and updates to the APCR auction supply schedule are crucial elements that could shape future market movements. The surplus bank of allowances, previously a concern, is now viewed less critically.
Global Context and Future Outlook
The global carbon market continues to evolve, influenced by various factors ranging from regulatory changes to geopolitical events. The OECD’s new climate group and the EU’s concerns over emissions trading standards highlight the complexities of international cooperation in carbon markets. The CFTC’s principles for carbon credit derivatives contracts further add to the landscape, indicating a trend towards more regulated and standardized market practices.
In the voluntary carbon market, despite the challenges posed by the REDD sector, trading remains active. The outcomes of COP28, especially the discussions around global mitigation strategies, are expected to cast a long shadow over future market trends.
