Allowance Purchase Price - Emissions Annex Provision
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EU Emissions Allowance Transaction Annex to the 2005 ISDA Commodity Definitions A Jolly Contrarian owner’s manual™
Allowance Purchase Price in all its glory
Comparison See our natty emissions comparison table between the IETA, EFET and ISDA versions of emissions trading docs
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Overview
The same broad concept is dealt with as follows:
- ISDA: Allowance Purchase Price
- EFET: Contract Price
- IETA: Allowance Price
To make sense of this definition — and bearing in mind always that a purchase “price” is an purchase cost per unit, not an aggregate purchase amount so the Allowance Purchase Price is, say, EUR 95, whether you are buying 1 Allowance or a thousand of them — you must proceed with all haste to paragraph (d)(i)(1).
Summary
This is the unit price — not the total sum — you have agreed to buy the Allowances for, in the future, at the end of the Transaction. You can therefore straight-line interpolate your carry at any time, and work out whether it is greater than your cost of funding (if it is, yay, you are making a turn!) or less. On the trade date you might expect them to be more or less the same, but for any contango (upward slope) in the Emissions forward curve. The EUA “curve” is often in contango — structurally, because the number of Allowances to be issued in each new year of the Phase 3 Compliance Period of the EU ETS is scheduled to decline, and that is expected to outpace the energy transition efforts in the European corporate and energy sectors.
You may be as disappointed as I was to discover there is no label for what one might have called the “Purchase/Allowance/Contract Amount”; instead you must settle for trotting out its formula (ISDA: Allowance Purchase Price x Number of Allowances, EFET: Contract Price x Contract Quantity, IETA: Allowance Price x PTA Quantity), or allude gnomically to “the amount calculated in accordance with” relevant clause reference”, which will hardly help someone not intimately familiar with the documentation. The number of people in the world who are intimately familiar with the Emissions Annex, by the way, would correlate quite closely with they of the Carbon Squads who drafted it. And even some of them are, we rather think, a bit woozy on some of the details.
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- The JC’s famous Nutshell™ summary of this clause
- A bit of confusion if you could be buying and then forward selling Allowances in the same Transaction (look it could happen)