Russia´s invasion of Ukraine has sparked strong reactions across markets and the commodity and energy story has been all about rising prices. However, just about the same time when all energy and commodity markets priced in the war-risk, the European carbon market did the same but in the complete opposite direction.
The EUA Dec-22 contract went into a free fall as a direct result of Russia’s invasion of Ukraine. The move signalled a strong de-coupling from the rest of the energy and commodity complex and the market instead took cue from the European stock market.
So what are these price movements telling us? To put it simply, the carbon market is pricing in the risk of a recession and if current high energy prices remain, we will most certainly see demand destruction.
High energy prices mean high revenues for both traditional oil and gas producers but also for the renewable energy industry, which enables them to more rapidly introduce new high cost technologies. However, the long term economic impact will at some point also hit producers if we are seeing industry shut-downs and lower economic activities.
Another aspect to the de-coupling between carbon prices and the rest of the European energy complex is that coal is making a strong comeback. Looking at below graph of the European fuel switch from a historical perspective, but also noticing the forward contracts, the short- to medium term outlook does not look bright from an emission reduction perspective.