ANALYSIS SUMMARY – NOT ADVICE
By Mathew Carr
May 7-9, 2021 — LONDON: The European Union’s plan for a carbon border adjustment mechanism (CBAM) in 2023 could cause the region’s greenhouse gas permits to double, according to research by Morgan Stanley.
The CBAM, if put in place, would require importers to pay the equivalent of the EU carbon price on goods in energy intensive industries as they bring them into the EU. The planned measure is seeking to “encourage” other nations around the world to deploy carbon pricing if they want to trade with the bloc.
The most likely form of the EU Carbon Border Adjustment Mechanism will be a “notional emissions trading system”, where “a separate pool of carbon allowances is purchased on import at the EU emissions trading system price, but not traded,” Morgan Stanley analysts, including Victoria Irving in London, said in an emailed research note.
“If carbon allowances are wound down post 2026, carbon prices could increase under the EU ETS to +€100/tonne. For most high-carbon sectors, the overall impact is likely to be net negative or at least mixed for the EU producers, with any green premium offset by a potential increased carbon cost headwind from higher carbon prices and increased capex to decarbonise.”
WARNING: EU carbon has already more than tripled since the beginning of the global pandemic and the carbon border plan has not yet been made into law.
This week has been a bumper week for European climate policy, with Germany seeking to shift its net-zero target forward five years to 2045 (see link in notes) and 2030 limit to a 65% cut vs 1990 levels from 55%.
That move followed a March constitutional court ruling published last month that said of the requirements to cut greenhouse gas (see links below):
“These future obligations to reduce emissions have an impact on practically every type of freedom because virtually all aspects of human life still involve the emission of greenhouse gases and are thus potentially threatened by drastic restrictions after 2030. Therefore, the legislator should have taken precautionary steps to mitigate these major burdens in order to safeguard the freedom guaranteed by fundamental rights.”
EU carbon jumped to a record above 51 euros a ton late on Friday in London on ICE Futures Europe (WARNING II: It’s not entirely clear whether a tighter 2030 target for Germany will translate into a tighter EU carbon market cap for the same period. Please get in touch if you know.):
For foreign exchange and trade, a CBAM could put “upward
pressure” on the euro, but any trade tensions could result in USD strength, the bank said.
Decarbonisation leading equities could benefit in the long term. Near term, costs will be a headwind for high-carbon sectors from both incremental carbon taxes and investment in decarbonisation technologies, the analysts said.
Longer term, however, the decarbonisation leaders could benefit from greater access to capital and a potential lower relative cost base, the analysts said.
“We highlight in aluminium Norsk Hydro, in cement Lafarge, Holcim and HeidelbergCement, in chemicals Johnson Matthey
and Croda and in steel SSAB and ArcelorMittal.”
Carbon prices are also rising as the chance of intervention anytime soon in the market to limit gains is seen to wane:
Redshaw Advisors summarized price outlook for EU carbon Friday evening London time like so:
Outlook: Following the end of the compliance period there were question marks about whether EU allowances could continue April’s gains; those questions have been answered emphatically by the bulls this week. A further €2.25 has been added and the close just off the high puts the bulls in total control going into next week. We will analyse this week and the outlook for next week in Monday’s WeeklyRed.
EUA Closing price: €51.07
2021 average closing price: €40.09
(Updates with links, price chart, tweet, context, second warning; earlier adds Redshaw price outlook, closing price; earlier adds first warning)