Policy Risk and Forward Expectations in EU Carbon Allowance Prices
Summary
The discussion asks whether EU Emissions Trading System allowance prices can be projected from spot prices using a single discount rate or another market-implied method. The responses point to policy risk as a reason forward prices may sit below expectations of future spot prices: a rapid rise could provoke political intervention intended to ease costs for industry. That risk is political, so the discussion says it has no clear proxy in financial market data.
One proposed approach is to compare forward prices with consensus forecasts, but that substitutes analysts’ views for the market expectations the question seeks. The discussion gives no pricing model, quantitative evidence, or way to extract an unbiased expectation from current prices. It is a brief exchange, and its policy-risk explanation is presented as an interpretation rather than a measured premium; the referenced external answers and further reading are not included in the document.
Key ideas
- Policy risk may separate EU allowance forward prices from expected future spot prices.
- Potential political intervention could limit price increases if they threaten industry.
- The discussion identifies no financial time series that directly measures this political premium.
- Consensus forecasts can be compared with forward prices, but they do not reveal market expectations independently.
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Full text
# Accounting for upward expectations in EU ETS CO2 allowances prices # Accounting for upward expectations in EU ETS CO2 allowances prices #### Context #### Questions - Q1: Is it (approximately) right to view it in terms of a single discount factor (a rate that can be used to divide or multiply) or is that too far off from the result an actual/realistic stochastic discount factor would provide? - Q2.a: If so, what would the right rate to apply those discounts (for instance, the risk-free rate seems too low for that to me, considering the expectations of >100 held during much of 2025 when the price stayed around 70-80€)? - Q2.b: If not, is there a way to "push" the current spot price forward in time to make it the "market's estimate" for any particular date ahead (let's say 2030 as in the example above). ## Answer by Juan Martinez (score 0, accepted) https://quant.stackexchange.com/a/85406 The most satisfying answer I've found yet presents the strong discount as born out of policy risk: if the price actually reflected future expectations it could end up too high too soon, threatening EU industry, which could trigger an intervention (something like RePowerEU) to bring the price back down. Because of the political nature of this risk, there's no financial series that can yield a proxy of this premium. The only way I can think of going about it is to assume consensus forecasts are representative of market expectations and compare these with forward prices. But that defeats the purpose of the question, which was to find a way to get the market's expectations themselves. ## Answer by João (score 0) https://quant.stackexchange.com/a/85475 although you've mostly found what you've been looking, here's a nice reading for you that better explains my comment. Also, try to check the recent news about the EUA allowances, you had a lot of banks targeting 100 for EUAs but check the prices for today and the last EU meeting ;)
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