In the October issue of Ticino Management, Igor Rebesco (Co-CIO of Custodia Wealth Management) begins with a fact that many portfolio managers are well aware of: the bond/equity pairing no longer protects portfolios as it once did, because the correlations have reversed. He then points to a less-traveled path to diversification: European Union Allowances (EUAs).
It’s a unique asset class. Supply is determined by the legislature, and part of the demand is mandated by law, but EUAs are traded on a liquid market comprising spot, futures, and options. The price depends on the cap, the surplus of allowances in circulation, weather conditions, and geopolitical factors. Most importantly, it depends on fuel switching—that is, how cost-effective it is for electricity producers to use gas instead of coal.
The article mentions a rigorous formula for calculating the theoretical switching price. For those who want to delve deeper, I’ve prepared an in-depth analysis. It’s a companion book that updates “Environmental Finance and Investments” (Chesney, Gheyssens, Pana, Taschini – Springer) through 2026.
Inside you’ll find:
→ why EUAs are neither a commodity nor a traditional financial instrument, but a regulated asset class in their own right
→ the price drivers, from CAP and MSR to CBAM and ETS2
→ the switch price formula explained step by step, using TTF and API#2 as benchmarks
→ why the theoretical price and the observed price diverge, and how TNAC helps explain the gap
→ the real options approach to environmental investment decisions
Please find the document attached.
Enjoy the read.
Disclaimer
This post reflects the personal opinions of the Custodia Wealth Management staff members who authored it. It does not constitute investment advice or recommendations, nor does it constitute personalized advice, and should not be considered an invitation to engage in transactions involving financial instruments.
