Neutralise your EUA price exposure
With the scope of the EU Emissions Trading System expanding, the free allocation of allowances phasing out, and the EUA price forecast to increase, companies’ exposure is rising rapidly.
SparkChange Physical Carbon EUA ETC ("SparkChange CO2") allows companies to neutralise that exposure.
EU ETS scope increasing
More EUAs will have to be surrendered, and a greater share of these will have to be bought.
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.
Furthermore, subsidies to the Aviation industry present since 2012, will expire at the end of 2025. 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.
EU ETA Free allowances phase-out and CBAM phase-in
As the CBAM is implemented, the free allocation of allowances that companies have historically relied upon will be phased out. There will be 1.9Gt allowances < less> supply by 2030 in the EU, putting the EU ETS on track to be NetZero by 2040.
The end result – companies will have to surrender allowances for a greater share of their emissions, and more of these allowances will have to be bought.
Outlook for carbon pricing
The EUA Price is forecast to more than double to 2030e, and triple to 2035e.
With the EUA price closing H1 2024 at €66, analysts forecast prices of close to €150 in 2030, and close to €200 in 2035[1].
This price appreciation is underpinned by regulatory tailwinds, and driven much more by increasing supply-side scarcity, as opposed to subjective emissions scenarios.
In that context, and with an annualised volatility of 35.2, the appetite to secure EUAs – both for investment and as a hedging instrument – is increasing.
With more emissions to be bought, at a higher future price, companies are increasingly looking to hedge their EUA price exposure. SparkChange CO2* is a suitable hedging tool for different market participants:
From 2024, the Maritime Industry is in scope of the EU ETS. Large ships (5000 gross tonnage and above) have to surrender allowances for 100% of their CO2 emissions that occur in trips between two EU ports and 50% of emissions starting or ending outside of the EU. Surrender of allowances will be phased-in. Shipping companies have to surrender allowances for 40% of such emissions for 2024, 70% for 2025, and 100% from 2026 onwards. They will also need to start surrendering allowances for Methan and Nitrous oxide emissions from 2026. By 2027, Offshore large ships will be in scope of the EU ETS too and the EU Commission is considering whether to include smaller offshore and general cargo ships in the near future.
Emitters need to surrender Allowances by September 30th the year after the emission takes place. The supply of EUAs to meet Maritime’s demand however, is handed out already in 2024, and not just the 40%, but the full 100%. This 60% ‘surplus’ of EUA supply will be withheld from future auction supply in 2025, correcting for the loosening impact. This will create a bearish balance in the short-term and a tighter supply for the years to come.
Shipping companies will not receive free allocations of EUAs. These will need to be acquired through auctions.
Maritime Industry key players such as owners, managers, and charterers are moving towards assigning the costs of EU ETS compliance to each other through their contracts. Counterparties can agree to financially settle the allocation of such costs with a formula linked to the closing price of a physical EUA over a period of time.
SparkChange CO2 allows Maritime Industry players to manage their price exposure to Carbon through the liabilities of their contracts without having to establish and maintain a registry account in the EU ETS, pay custody fees to an intermediary or potentially pay the cost of contango when buying futures.
Click here for an illustrative example of the cost of hedging using SparkChange CO2 compared to EUA Futures.
Aviation Emissions, EU ETS and its Financial Impact:
Aviation has been included in the EU ETS since 2012. "Free Allowances” have been phased out and will completely expire by the end of 2025. EUA investment is what it says on the tin – an investment.
Carbon offsets are a cost and come with additional risk. Why address risk with more risk?
In 2023, the EU ETS successfully captured 22% of aviation emissions (164.5 Megatonnes of CO2) from flights originating within Europe. This achievement is attributed to the system’s current scope, which is limited to intra-EU flights.
The cost of carbon has emerged as the third largest expense for major European airlines in 2023, following fuel and labour costs. Carbon price change is a risk with profound implications for the whole aviation supply chain from fuel supplies to OEMs and aviation finance. It should be evaluated as such.
To comply with current EU ETS regulations, airlines operating in Europe collectively paid €3 billion in EUA allowances. Compliance carbon costs are rising significantly by 2030.
Click here for a Case Study on how to hedge residual value risk as an aviation lessor.
SparkChange CO2 allows the Aviation Finance Industry to manage their price exposure to Carbon through the liabilities of their Aircraft Scope 3 Emissions without having to establish and maintain a registry account in the EU ETS or pay custody fees to an intermediary. There is a huge difference between physically-backed investment opportunities and EUA Futures. Know your carbon - Click here for an illustrative example of the cost of hedging using SparkChange CO2 compared to EUA Futures.
The Carbon Border Adjustment Mechanism (CBAM) is an effort to eliminate the risk of carbon leakage -when companies are incentivised to relocate production outside the EU where there are lower or null costs to GHGs. From 2026, energy intensive imports into Europe will be subject to the EUA price at the border.
Importers will have to pay, at prevailing Carbon Prices, the GHGs embedded in imported goods. They will have to buy CBAM certificates corresponding to such GHG. CBAM Certificate’s price will be equivalent to the weekly average auction price of an EUA at the time expressed in EUR/tonne of CO2 emitted. The idea is that same pricing for CBAM certificates and EUAs, will create a levelled playing field between EU and non-EU producers.
Importers will be required to keep the equivalent (in CBAM Certificates) to 80% of their emissions since the beginning of the year by the end of each quarter. This means they will face operating costs that are highly sensitive to an already volatile EUA price. Companies are likely to hedge this risk. Buying CBAM Certificates in advanced will not be a mid- to long-term solution: CBAM Certificates have an expiry and limited validity: By 30th of June each year, all certificates purchased during the previous year will be cancelled. Furthermore, they cannot be traded between importers taking away the flexibility of profitability.
SparkChange CO2 allows Importers to manage the mid- to long-term price exposure to Carbon to their operations without having to establish and maintain a registry account in the EU ETS, pay custody fees to an intermediary or pay the cost of contango when buying futures.
Click here for an illustrative example of the cost of hedging using SparkChange CO2 compared to EUA Futures.
Exchange-Traded
SparkChange CO2 trades on exchange*, meaning low transaction costs, no position limits, no minimum holding period.
Physically Deliverable
Units in SparkChange CO2 are backed by physical EUAs held in our registry account. Physical backing allows for physical delivery, if desired.
Avoids Contango
SparkChange CO2 avoids contango, the performance drag associated with EUA futures-based products, reducing hedging costs.
No Expiry
Unlike EUA Futures and CBAM Certificates, physical EUAs have no vintage and can be used to hedge long-dated exposure.
*London Stock Exchange, Xetra (Germany), Borsa Italiana, BMV (Mexico)