Factor

Factor: The price of CO2 falls since the coronavirus crisis began

07 April 2020 | Trading

 

The value of the EUA reflects a 25% drop since the start of the pandemic.

The price of CO2 emission rights has gone from 24.50 euros per ton of CO2 at the beginning of the year to close in March at € 17.55 / t. This decline has placed the EUA listing at the lowest price since 2018.

Since the beginning of 2020 the market has been affected by different circumstances such as Brexit, the European Green Deal or the coronavirus. The latter being a bearish factor with negative effects, has caused a sharp decrease in the price of CO2.

Energy commodities (oil, coal, natural gas or CO2, among others) and the main financial indexes are being affected by this health crisis. The price of CO2 in the month of February ranged from € 23.11 / t to € 25.66 / t. This last month of March, the EUA ranged between € 17.55 / t and € 23.49 / t and had an average of € 19.82 / t, which represents a decrease of 20% compared to the 2019 average, € 24.85 / t of CO2.

 

Why is the virus affecting the emission market?

As has happened in all the energy and financial markets, the month of March anticipated the loss of wealth and employment derived from the containment measures necessary to control the pandemic. In the case of the EUA, it is believed that the strong correction suffered during the first 20 days of March was due to the accelerated exit of investment funds and the sales of other financial actors such as option traders.

It is difficult, if not impossible, to establish what the floor of the price will be in the short term, although in the medium-long term a stabilization of the markets is still expected.

“In the medium term, two opposite factors emerge. On the one hand, the slowdown in the euro area will undoubtedly lead to a sharp drop in CO2 emissions and in the demand for emission rights from the electricity sector, the electro-intensive industry, and aviation, "explains Iker Larrea, Partner and Head of the Markets Division of Factor Ideas for change. On the other hand, the market has automatic mechanisms to reduce the supply of emission rights as emissions decrease (the MSR and dynamic adjustments to the free allocation), and this should act as a support to the price. The market is designed to reverse at high prices as soon as the pandemic is overcome, ”adds Larrea, an expert in carbon markets and climate finance.

The EUA has rebounded from € 15 to € 18 in recent days, but the price evolution in the second quarter will depend on how the first global shock caused by the pandemic is resolved.

 

How the CO2 emissions market works

Emission rights trading is a market instrument, by means of which an economic incentive or disincentive is created that seeks an environmental benefit, the reduction of emissions of polluting gases into the atmosphere by a group of industries.

Then a market tool arises, which imposes a maximum on the levels of CO2 that can be emitted by industrial facilities and airlines, through permits to emit a certain amount of gases that tend to decrease over time. In this way, a market for the sale of permits is created, which companies must have to acquire according to the amount of gases they emit per year, otherwise they will be punished by economic sanctions.

 

Factor has more than 15 years of experience offering technical consulting services in the areas of climate change adaptation and mitigation, carbon footprint analysis, sustainability, circular economy, renewable energy and carbon markets, amongst other things, undertaken on behalf of governments and international organizations, as well as for over 400 companies, with more than 1,100 projects undertaken within 40+ countries.

 

 

For more information: 

Maider Baranda Fernández

mbaranda@iamfactor.com

94 424 05 63 (ext. 2003)

 

 

 

Source: Factor