Allowance Price - Emissions Annex Provision
EU Emissions Allowance Transaction Annex to the 2005 ISDA Commodity Definitions
A Jolly Contrarian owner’s manual™
Allowance Price in all its glory
See our natty emissions comparison table between the IETA, EFET and ISDA versions of emissions trading docs
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The same broad concept is dealt with as follows:
- ISDA: Allowance Purchase Price or Allowance Strike Price, as the case may, from time to time, be, though the JC uses the term “Allowance Price” to cover both).
- EFET: Contract Price
- IETA: Allowance Price
Well, this is embarassing. There’s no such term in the ISDA Emissions Annex, despite the term being used in it (well, once). Whoopsie. By context it could refer to either an Allowance Strike Price — for an Option — or an Allowance Purchase Price — for a Forward. It is the same concept as in the other Master Agreements. Since using it does away with a lot of “Allowance Purchase Price, in the case of a Allowance Forward Transaction, or Allowance Strike Price, in the case of an Allowance Option Transaction, as the case may be” you might think Allowance Price might have been a good innovation, and in any case it is one that the JC will shamelessly use to save the frightful confection set out above.
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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.
- The JC’s famous Nutshell™ summary of this clause