EU Emissions Annex: Difference between revisions

EU Emissions Annex (view source)

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 A forward contract is intended to get a risk off your books. Why now, rather than later? Well — the person needing an Allowance for compliance purposes only needs it at the end of a compliance period. Until then, it clutters up the balance sheet, costing money. (If you buy it, you have to pay for it. This uses capital you might rather use for something else.) On the other hand, the market price of Allowances tends to rise, in part by deliberate intervening design on the part of the EU ETS. So compliance users have conflicting emotions: on one hand, I would like to lock in the price, now, of an Allowance, so I am not at the mercy of the rapacious market; on the other, ideally I would rather not fork over any money until I actually need the Allowance.
-The solution: a forward contract. You strike your price today — it won’t be today’s ''spot'' price of course; it will be today’s ''forward'' price, which will likely be higher —  but we only settle the trade at maturity, when you need the Allowances for compliance purposes.
+The solution: a [[forward contract]]. You strike your trade today — it won’t be today’s ''spot'' price of course; it will be today’s ''forward'' price, which in a [[contango]] market will be higher —  but you only ''settle'' the trade — pay for it, and get the goods — at maturity, when you actually need the {{euaprov|Allowances}}.
 What do we get out of striking this trade now?
-Well, the Seller achieves a guaranteed return on the EUA investment equal to its prevailing forward price, come what may in the future. If the arse falls out of the carbon market — can happen — even if the Eurocrats in Brussels ''give up on the carbon market altogether'' in the mean time — that risk is no longer mine. I just wait out the contract and deliver you these worthless certificates and you pay me the money.
+Well, Seller achieves a guaranteed return on its investment: The return over the term of the period is {{font|helvetica}}''forward price - spot price * Number of Allowances''</span> which, articulated in another way, is a fixed rate of return.
-The Buyer gets that certainty of the carbon price, and has found a nice friendly lender to sit on the Allowance for the meantime.
+The Seller gets its return should the arse falls out of the carbon market — can happen — or even if the Eurocrats in Brussels ''give up on the carbon market altogether'' in the mean time — that is the risk that buyer assumes by entering into the forward purchase.
+Buyer has all “Allowance” risk; Seller just has to pony up the Allowances.
+Which does make you wonder what the divers [[Carbon Squad]]s had in mind when they contrived the “[[Then I woke up and it was all a dream]]” method of resolving settlement disruptions.