CRU: EU Steel: Why Carbon Matters More with COVID-19

Europe's carbon market has remained firmer than many other commodity markets so far since the onset of COVID-19. At the beginning of May 2020, the price of emitting a tonne of CO2 in the EU Emissions Trading Scheme (ETS) stands at €20 down from a peak of around €23 when the COVID-19 crisis emerged in March. This contrasts markedly with trends observed during the Global Financial Crisis (GFC) when the carbon price crashed by around 2/3rds as permits were sold off to generate cash for industrial and power producers.

Europe's carbon market has remained firmer than many other commodity markets so far since the onset of COVID-19. At the beginning of May 2020, the price of emitting a tonne of CO2 in the EU Emissions Trading Scheme (ETS) stands at €20 down from a peak of around €23 when the COVID-19 crisis emerged in March. This contrasts markedly with trends observed during the Global Financial Crisis (GFC) when the carbon price crashed by around 2/3rds as permits were sold off to generate cash for industrial and power producers.

Why are carbon prices more stable? On the face of it, this may appear surprising. EU industrial production is set to fall by more than 7 percent in Q2 2020 – a similar rate of contraction to the depths of the GFC crisis in early 2009 – reducing the demand for CO2 allowances (and thus the implied stringency of the total emissions limit, or 'cap'). Moreover, gas prices have fallen to historical lows of around US$2.0/MMBtu, reducing the cost of substitution away from coal fired power production (although recognising that thermal coal prices have fallen substantially also). The answer is mostly due to policy.

Today, the ETS is far more established, having been extended to cover new gases (such as nitrous oxides) and sectors, including aviation. This increases its liquidity, reducing volatility. Moreover, the new Market Stability Reserve (MSR) – a mechanism to ensure that any temporary surplus of allowances is held "off market" to prevent a price crash – and the expectation of an ever stricter cap in the next Phase (IV) of the scheme starting in 2021 incentivises firms to save rather than sell any spare allowances. This further limits downward price pressures (see here for further discussion of the new ETS policy rules).

Read the full story:
https://www.crugroup.com/knowledge-and-insights/spotlights/2020/eu-steel-why-carbon-matters-more-with-covid-19/ 

Read more about CRU: http://bit.ly/About_CRU

About CRU

CRU offers unrivalled business intelligence on the global metals, mining and fertilizer industries through market analysis, price assessments, consultancy and events.

Since our foundation by Robert Perlman in 1969, we have consistently invested in primary research and robust methodologies, and developed expert teams in key locations worldwide, including in hard-to-reach markets such as China.

CRU employs over 280 experts and has more than 11 offices around the world, in Europe, the Americas, China, Asia and Australia – our office in Beijing opened in 2004 and Singapore in 2018.

When facing critical business decisions, you can rely on our first-hand knowledge to give you a complete view of a commodity market. And you can engage with our experts directly, for the full picture and a personalised response.

CRU – big enough to deliver a high-quality service, small enough to care about all of our customers.

Logo: https://mma.prnewswire.com/media/536199/CRU_Logo.jpg

Photo: https://mma.prnewswire.com/media/1168437/CRU_EU_Steel_carbon.jpg