As Power Generation Falls, EU Allowances Prove Resilient

Declining European Union power generation and reduced industrial sector demand reflect macro challenges this year. EU carbon allowances dropped but ultimately proved resilient despite declining power output and demand this year.

Power generation in the EU fell 5.8% between January and July compared to the same period last year. Gas-fired electricity dropped 18% in the first seven months of the year, while hard coal-fired power fell 24% YoY. The only power generation to gain thus far this year were renewables at 6.7% YoY growth.

“Trading activity has slowed in terms of liquidity, but prices have shown impressive resilience in the face of a poor macroeconomic outlook,” KraneShares explained on the Climate Market Now blog.

EU carbon allowances peaked at nearly €95 ($103 USD) in June before declining. EUAs spent most of the next two months priced between €83 and €86. EU carbon allowances currently are priced close to €88 ($96 USD).

Despite falling energy output and declining demand, EUAs prove resilient.

“The resilience is put down to the impact of changes to the market parameters, which will begin to take effect next year,” KraneShares explained. Market tightening and cap reductions are just two of the positive fundamentals looking ahead. The addition of coverage of the maritime industry’s emissions and the elimination of free EUA allocations also create the potential for fundamental upward pricing pressure long-term.

See also: “EU Carbon Market Tightening Means Opportunity for KEUA

Invest in the Long-Term Outlook for EUA Prices

The KraneShares European Carbon Allowance ETF (KEUA) offers targeted exposure to the EU carbon allowances market and is actively managed. The EU carbon market covers over 12,000 participants and a variety of industries. Participation is mandatory for companies within predetermined industries such as power, agriculture, industrial, and aviation.

Price chart of KEUA YTD, currently at 33.07 as of 08/16/23. The fund is above both its 50-day SMA (32.72) and its 200-day SMA of 32.29.

KEUA is up 8.96% YTD. The fund crossed above its 200-day Simple Moving Average on 08/11/23 and above its 50-day SMA on 08/15/23.

The fund’s benchmark is the IHS Markit Carbon EUA Index. This benchmark tracks the most-traded EUA futures contracts, the oldest and most liquid carbon allowances market. Currently, the market covers roughly 40% of all EU emissions, including 27 member states and Norway, Iceland, and Liechtenstein.

KEUA has an expense ratio of 0.78%.

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