EUA
Permits to pollute
EUA (ISIN EU000A1RRN98) are permits to pollute under the EU ETS cap and trade system, giving the holder the right to emit one tonne of carbon dioxide (CO2), or the equivalent amount of two more powerful greenhouse gases, nitrous oxide (N2O) and perfluorocarbons (PFCs).
The European Union prints an annually decreasing amount of EUAs under the EU ETS. Withholding an EUA therefore reduces the supply available to polluters, forcing pollution reduction (via a higher price/cost to pollute).
Because of its increasing scarcity, EUAs has been one of the best-performing commodities in the world. It is an emerging asset class in its own right.
Supply reductions of EUA are the most significant element of the EU ETS and are set in stone by the EU.
There are two ways that supply of EUA is reduced:
The first supply reduction is the original annual reduction of 2.2% per annum. This is expected to step up to over 4% to meet the EU’s new 55% (previously 40%) 2030 emission reduction target (based on 1990 levels) as part of the ‘Fit for 55’ proposals currently being debated by the EU.
The second supply-tightening mechanism put in place by the EU came into being in January 2019 and is called the Market Stability Reserve (MSR). The EU introduced this in an effort (after many different attempts since 2013) to raise the EUA price to a meaningful/impactful level. Under certain conditions, pre-scheduled auction levels will be reduced significantly. Over the last three years, 2019 to 2021, the MSR has reduced auction supply by an average 36%. In terms of demand (i.e. emissions) the impact is more accentuated, implying a 48% reduction. We believe that this rate of reduction will continue for the foreseeable future.
Notable properties of EUA:
A valuable commodity. EUAs of the EU ETS were one of the best performing commodities of 2021. These allowances are uncorrelated in price with most assets. Their price tends to rise because of supply cuts: the total number of allowances in circulation (TNAC) is designed to decrease every year to fight climate change. Because the supply of allowances is diminishing, their scarcity value is increasing.
A great store of value. As these allowances are backed by the remaining carbon budget of the EU, it is logical to assume that, through supply reduction, they will keep increasing in value as we get ever closer to a 1.5 ºC global warming scenario where most tipping points could be triggered.
A great net-zero instrument. Hoarding these valuable allowances are also a great way to achieve net-zero as industrials won’t be able to use these permits to pollute, hence, the total number of allowances won’t increase further in subsequent years. In fact, the longer people hold allowances, the better for the environment, as under the EU law, allowances not used one year will cause reduction of allowances issued in subsequent years. For all these reasons, EUAs are recognized as a valid way to achieve net zero emission targets by the Paris Aligned Investment Initiative.
A means to drive government action on climate. The EU requires countries to allocate at least 50% of the money collected from EUAs to build other sustainable renewable energy projects across the union, further accelerating the energy transition.
Thanks to Kakubi and the KKB Token, EUA from the EU ETS are now bridged into Ethereum for the first time.
Every year, by April 30th, polluting companies have to deliver, to their respective governments, EUAs to offset/match their prior calendar year carbon emissions. EUAs are issued/sold by the EU and each one represents the right to emit one tonne of carbon dioxide. The annual supply of EUAs falls each year to force companies to reduce their emissions thereby enabling the EU to meet its 2030 and 2050 emission reduction targets.
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