Natural Gas Supply Issues Drive Up Carbon Allowance Prices in EU

  • Oct 06, 2021
  • Investing

Supply shortages of natural gas have caused carbon allowance prices to soar as more companies are forced to turn to emissions heavy coal as an energy source, reports the Financial Times.

Carbon allowances in the EU last week were over 65 euros a ton, a record high, and in the UK, the carbon allowance market was a record £76 per ton. The region’s current cap and trade systems mean that companies are only allowed a certain emissions allotment a year, with a cap set on targets that align with the Paris Agreement goals. Any emissions above the allotment and the company must purchase a carbon allowance that equates to one ton of emissions.

In early September, it was more than five percent of the UK’s power supply, the highest it has been since March and is happening when levels should be at their lowest. It’s a trend that is expected to carry through over the winter months and which could see soaring natural gas prices.

“There will be this fuel switch from gas to coal and therefore higher emissions from the power sector,” potentially carrying over into 2022, said Sebastian Rilling, EU power and carbon markets analyst at ICIS.

The KraneShares European Carbon Allowance ETF (KEUA) offers targeted exposure into the EU carbon allowances market only, capturing the increasing prices in the highest-priced carbon allowance market globally.

KEUA offers exposure to the European Union Allowances cap-and-trade carbon allowance program only and is actively managed.

The fund’s benchmark is the IHS Markit Carbon EUA Index, an index that tracks the most-traded EUA futures contracts, a market that is the oldest and most liquid for carbon allowances. The market currently offers coverage for roughly 40% of all emissions from the EU, including 27 member states as well as Norway, Iceland, and Liechtenstein. The annual cap reduction was recently increased from 2.2% to 4.2% to meet long-term carbon emission targets.

As the fund is actively managed, it may invest in carbon credit futures with different maturity dates or weight futures differently from the index. The fund potentially trades in CTFC-regulated futures and swaps above the CFTC 4.5 limit and is therefore considered a “commodity pool.”