Carbon prices soar as energy crisis deepens for Europe

Russia has started to follow through on its threats to cut Europe’s oil and natural gas supplies, cutting off natural gas supplies to Bulgaria and Poland last week. It has left the EU, already facing soaring energy costs in many regions, even more pressured to find quick substitutes for natural gas in particular. The EU currently imports 40% of its supply from Russia, reports CNBC.

Russian state energy company Gazprom cut off natural gas supplies to Poland and Bulgaria after the two countries refused to pay in roubles, a stipulation put in place by President Putin as Western countries rallied in support Ukraine. In response, European Commission President Ursula von der Leyen on Wednesday accused the Kremlin of blackmailing the EU.

“It helps to open the eyes of those who still thought Russia would not use gas as leverage,” an EU official said on condition of anonymity.

The Kremlin has said it will continue to cut off oil and gas supplies to countries that refuse to pay in rubles. Many EU countries are scrambling to find alternative energy sources – to acquiesce and pay in rubles would violate current EU sanctions.

“Russia’s decision to stop gas flows to Poland followed Berlin’s decision – under intense political pressure – to supply Ukraine with air defense weapons. The implicit threat is that Russia will cut off gas gas supply from Germany if Berlin continues to ship arms to Ukraine,” analysts at Gavekal, a financial research firm, wrote in a note last week.

Meanwhile, the United States has pledged to send the EU a minimum of 15 billion cubic meters of liquefied natural gas this year. Several countries pay in euros to Gazprombank, which then converts them into rubles, technically in accordance with sanctions.

“Russian gas is different – a much bigger challenge and that’s really because a lot of[s]industries depend on gas as a commodity to make their product…so that could cause a second-order effect specifically in the European economy,” UBS CEO Ralph Hamers said in an interview with CNBC.

Carbon prices on the rise in Europe

Future prices for European Union allowances have been on the rise since April 27, with the halt in supplies from Russia to the two EU countries, rising from 81.01 euros to 84.45 euros on Friday, April 29. Expectations of an increased need for gas and natural gas mean increased emissions. An environment with rising emissions usually means rising carbon allowance costs, as more companies need allowance offsets.

Image sources: ember

the KraneShares European Carbon Allowance ETF (KUA) offers targeted exposure to the EU carbon allowance market and is actively managed.

The fund’s benchmark is the IHS Markit Carbon EUA Index, an index that tracks the most traded EUA futures, which is the oldest and most liquid market for carbon allowances. The market currently offers coverage for around 40% of all EU issues, including 27 Member States and Norway, Iceland and Liechtenstein. The annual cap reduction was recently increased from 2.2% to 4.2% to meet long-term carbon emissions targets.

As the fund is actively managed, it may invest in carbon credit futures with different expiry dates or weight the futures contracts differently than the index. The fund potentially trades CTFC regulated futures and swaps above the CFTC 4.5 limit and is therefore considered a “commodity pool”.

KEUA has an expense ratio of 0.79%.

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Mary I. Bruner