The Day After

Reflections on the carbon market liquidation

Dr. Russell Oakes: “Do you understand what's going on in this world?”

Dr. Landowska: “Yeah. Stupidity. Has a habit of getting its way.”

- The Day After (1983)

In less than one month the EU carbon price has collapsed from almost €98.50 per tonne to €55 per tonne, a drop of 44%. As I publish this note the price has rebounded slightly, to above €60 per tonne.

A wave of selling pressure apparently sparked by forced selling by Russian emission allowance holders, resulted in the triggering of margin calls and options market activity that led to a torrent of red.

This experience will scar many investors who only weeks ago were cheering the trade of the past twelve months. Whatever happens next the market will take some time to recover its poise.

In this article I look at some of the factors investors may have forgotten about over recent weeks. These are the fundamental factors that underpin the need for a strong carbon market, and one with a high enough price to drive decarbonisation.