Our suite of China-focused ETFs provides investors with solutions to capture China’s importance as an essential element of a well-designed investment portfolio.
Our market update is a collaboration between the KraneShares internal research department, our local Chinese partners, and select China thought leaders from around the world.
To start with, the role of EUAs is to act as a deterrent against emissions of greenhouse gases.
Because burning coal emits twice as much CO2 than natural gas per megawatt-hour of power generated, the relative costs of gas and coal are very important.
As the chart below shows, carbon simply didn’t keep up with the shift in generation economics, and never reached the level it needed to be at, to keep gas at the top of the merit order.
The number of EUAs issued into the market each year declines at 2.2% a year from 2021 through 2030, and most analysts believe this already leaves the market short on an annualized basis.
These proposals are all seen as supportive of future EUA prices and served to underpin much of the price rally in the first half of 2021 when prices rose from €32 into the €50s.
But it was the rise in gas prices that boosted carbon the most.
And while carbon prices tried to keep pace with gas well into the fourth quarter, it eventually became apparent that EUAs would have to rise to unsustainable levels to keep gas in pole position for power.
Clearly, investors still see the potential for EUA prices to decline or, at best, stabilize at current levels as long as the conflict in Ukraine continues.
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