Investments for a Greener Future
Spark Change Group Inc. develops listed and unlisted financial instruments that align and manage the risk associated with a transition to net zero.
An Overview of European Carbon Allowances
The EU Emissions Trading System is the largest carbon market in the world. It covers the heavy polluting industry and has been in place since 2008. As the EU’s main decarbonisation tool, it aims to reduce emissions by 55% by 2030.
€2bn
Daily trading volume
13,000+
Entities covered
1.2bn
Tonnes of emissions covered per year
40%
EU’s total emissions covered by the system
How it works
Incentivising CO2 reduction.
To cap pollution in Europe, the EU Commission forces industrial firms to obtain "permits to pollute", called carbon allowances or EUAs.
1 carbon allowance ⇒ 1 tonne of CO2
Under a Cap-and-Trade system, industrial firms that emit CO2 must obtain Carbon Emission Allowances from regulators – each allowance permits them to emit 1 tonne of CO2Supply of allowances is reduced annually
Legislation automatically reduces the supply of allowances each year, decreasing emissions over time and increasing scarcity value of allowancesIncentivises polluters to reduce emissions
An increase in the price of allowances forces firms to switch to greener solutions and reduce their greenhouse emissions
Why is carbon of interest today.
As of July 2024, the price of European carbon allowances was €68 per tonne of CO2.[1] The ‘Fit for 55’ reforms to the EU ETS have resulted in a more ambitious scope of the System, with Maritime emissions being subject to the regulation for the first time from 2024. This is followed in 2026 by the EU’s Carbon Border Adjustment Mechanism (CBAM), that will ‘price’ the emissions of carbon intensive imports into the EU. Analysts forecast prices of up to EUR 150 by 2030 [2]
* Past performance and forecasts are not reliable indicators of future results
1 Data from ICIS as of 31st July 2024
2 Analysts' high-low forecasts complied by Carbon Pulse for Q2 2024
Why accelerate decarbonisation
The time to act is now.
Finance industry agrees carbon is THE problem to solve
Climate “first among equals” in MSCI’s ESG trends to watch1 “Decarbonise or die”, world’s biggest investor warns business chiefs2
1 MCSI, 2022 ESG Trends to Watch
2 The Sydney Morning Herald
Politicians have created an unrealistic pathway
Meeting our climate goals requires a drastic cut to emissions in the future – double the reductions seen during Covid
Early action creates economic and environmental benefits
More attainable pathway
Less environmental damage
More realistic 2050 emissions
Faster adoption of new solutions
Accelerating decarbonisation
Investing in physical carbon allowances creates impact
Withholding allowances triggers an EU law that results in additional allowances being cancelled in future years, with irreversible effect.
Buying and withholding carbon allowances stops polluters from being able to use them during that period.
Increasing scarcity and investor demand results in higher carbon prices, which incentivises the switch from dirty fossil fuels to cleaner energy.
Preventing emissions
What triggers the cancellation of carbon allowances and their removal from the system?
The Market Stability Reserve: Brief history
During the financial crisis, the EU had no way of adjusting supply
This created an overhang of supply that suppressed prices for years afterwards
In response, the MSR was introduced to automatically adjust supply whenever emissions levels change
The effectiveness of the solution has been demonstrated by the price history
How the Market Stability Reserve Works
European Emissions Trading System surplus is greater than 833m allowances in circulation
24% of surplus EUAs are withheld from future auctions and transferred to Market Stability Reserve (MSR)
Amount of allowances in MSR above previous year’s auction volume are cancelled (as of 2023)
Driven by EU regulation
“Withholding 0.92 carbon allowances for 10 years prevents 1 tonne of financed emissions”
The emission reductions are driven by the cancellation effect of the Market Stability Reserve. Download the research paper for more information.
