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  • Writer's pictureAlessandro Vitelli

Everybody wants some

Updated: Mar 14, 2021

A month ago I reported on the rumours that the European Commission was considering action to limit the influence of speculative traders on the EU ETS.

At that time, EUAs were trading at €40. Yesterday (Friday) the market made a new all-time high and closed just 5 cents lower at €42.85. (I’ll confess I had a tweet with my usual image of a “43” lined up and ready to post…)

Carbon appears to have taken plenty of support from positive sentiment in equities and in the wider energy complex since the start of this month:

The rally and the reasons behind it have been a popular topic of conversation among market participants, for sure, and I've mentioned elsewhere that to some extent carbon seems to be defying gravity purely because other markets are minded to rise.

Simply, EUA prices are well beyond the fuel-switching level for even the most efficient coal plants. If we take the view that the coal-to-gas switch is pretty much locked in, and that coal plant phase-outs will remove this factor entirely in the years to come, what's next?

Most conversations seem to point towards longer-term industrial abatement, and whatever price of carbon is required to make that abatement happen.

So we may be in uncharted territory in which carbon isn't actually anchored by traditional, first-level abatement-based economics, but instead is reaching out to find the next one, which is somewhere "out there".

Remember that the Commission itself has said that a carbon price of as much as €90 may be required by 2030 to help green hydrogen be competitive.

And this may have had a knock-on effect on the political conversation about market intervention.

There has been no chorus of voices from politicians looking to stem the price rise. There’s been almost no noise from member state capitals, either: just one anonymous Commission official, and the Danish climate minister Dan Jorgensen saying “one of the things we definitely need to look into is the investment structures and whether or not they are dangerous.” Not a chorus.

In that blog a month ago I tried to explain that setting physical holding limits on EUAs would hurt compliance companies, and that setting position limits in derivatives would also hurt compliance companies.

Whatever the EU tries to do would have to be surgically aimed at non-compliance entities and their representatives: the banks who do the carry trade, buying in the auctions and selling futures to compliance, for example.

A few charts should show this quite clearly.

Firstly, here are the relative long positions on ICE Futures held by investment funds and compliance entities.

As things stand today, speculative positions represent just 12-13% of what compliance companies hold. And the last five weeks are the first time that figure has been in double digits. Is this share of the market a Dan-Jorgensen level of "danger"?

The second chart shows investment firms’ (banks) short positions compared with compliance long positions.

The almost identical size of the relative positions held by both categories underlines the critical role that banks play in servicing the compliance needs of industrials and utilities in the EU ETS.

So if the Commission wants to limit the influence the role of speculators in this market, it is going to have to tiptoe around the banks and compliance companies, both of whom hold the majority of all positions.

We already know from public statements by senior Commission officials that they are not minded to make any intervention. But that takes no account of the mood among politicians.

This brings me neatly on to the rather sudden wave of interest by, shall we say, non-traditional speculators. There’s been a strong increase in the chatter on social media about EUAs, and there’s no better way to highlight this than by quoting the newest cheerleader Raoul Pal:

EUAs are “one of the greatest macro trades no one is

involved in (and is pretty much uncorrelated with everything else)”.

(Let’s overlook the fact that he posted a video clip in which he enthusiastically referred to EUAs as “carbon credits”, which isn’t a hopeful sign unless it diverts some of his followers into the offset market.)

As the Twitter conversation highlighted, the EU ETS is to some extent protected against a surge of retail interest by the fact that it’s prohibitively difficult to get direct access to the market.

There is no EU-compliant exchange-traded fund at the moment, though two currently operate in the US. Punters could trade CFDs on outlets like, but beyond that, you’re really out of options.

What will be more interesting is whether the wider focus on EUAs leads to even more institutional investors to enter the market, but I don't think we need to worry about Wall-Street-Bets levels of interest. Yet.

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