An easy way to gain access to the market for European emission rights

An easy way to gain access to the market for European emission rights

23 November 2021 from Mikael Syding

Climate Convention COP 26 has just ended in Glasgow. One thing was clear, this is the beginning of the end for coal. Coal was once the saving angel of mankind. Finally, we could stop ravaging Europe's forests in search of energy. In fact, it was not far off that England became one big clear-cut. If coal had not seen the light of day, horses, oxen and humans would have had to toil all the more to even try to maintain the standard of living they had achieved. It was first coal and then oil that saved the environment and built our modern world.

But not everything will be forever. COP 26 had as one of the central issues that we "must" phase out coal as an energy source. One way to do this is to create clear financial incentives through issuing and trading in emission rights. The market with these works so that the authorities determine a total maximum level for carbon dioxide emissions and then these are auctioned off to the highest bidder. One right corresponds to emissions of one tonne of "carbon dioxide equivalents". The rights allow companies to choose between expensive investments to reduce their emissions or to buy the right to release the amount of business required. A little in the background is a hopeful development of technology for carbon capture - to capture existing carbon dioxide for reuse or long-term storage. At some point in the truly distant future, there is hope that nanotechnology and artificial biology, in conjunction with artificial intelligence, will be able to scrub the atmosphere on arbitrary amounts of carbon dioxide and reverse a hundred years of carbon abuse. However, this high-tech cousin of emission rights remains a dream for the time being, together with, for example, the hopes for fusion technology.

No, in the foreseeable future we will be able to use the technology available today. This means efficient carbon dioxide filters and reduced carbon burning in favor of other solutions. Higher visible costs for carbon dioxide emissions are a robust, clear and relatively fair method for quickly reducing emissions. This forces the primary sources to invest in other technologies and the higher final prices make customers choose other solutions that are not burdened by emission costs.

The research company Refinitiv has this year conducted a market survey regarding the prices of emission rights, where most of the 303 respondents expect rising prices to 80-100 EUR / tonne by 2030. I think this could be an unnecessarily cautious forecast. The experience from the Covid-19 pandemic shows a clearly increased focus on the problems of emissions and global warming. There are no signs that the trend would slow down, either among investors or politicians. I therefore believe that the amount of European allowances could be adjusted so that prices force a rapid adjustment. EUR 100 / tonne is palpable for the worst polluting companies, but not even the double price of EUR 200 / tonne would seriously threaten the global economy.

Vontobel has recently launched a new tracker certificate linked to emission rights prices. Underlying this is an ICE ECX EUA Future, which Vontobel has been offering mini futures on for a few months now. Through these new mini futures, investors can thus get a long or short exposure to the market for carbon dioxide emission rights in Europe.


@Mikael Syding

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This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capital protected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

26/11/2022 15:50:47


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