Total Number of Allowances in circulation (TNAC)

Total Number of Allowances in Circulation (TNAC)

The Total Number of Allowances in Circulation (TNAC) is a critical health indicator for the European carbon market. It represents the cumulative surplus of emission allowances that have been issued but not yet used for compliance by regulated entities. For investors, policymakers, and companies, the TNAC provides a transparent measure of scarcity or oversupply in the market, making it a primary driver of the price of European Union Allowances (EUAs).

Published annually by the European Commission, the TNAC calculation determines the number of allowances that will be withdrawn from or added to the market in the following year. A high TNAC signifies a glut of allowances, which can suppress prices, while a low TNAC indicates a tight, undersupplied market, often leading to price appreciation.

How the TNAC Works

The TNAC's primary function is to regulate the market's supply via the Market Stability Reserve (MSR). The calculation is fundamentally about measuring the difference between total supply and total demand since the EU ETS began.

• Calculation Formula: TNAC = (Total Allowances Issued – Total Allowances Surrendered for Compliance)
• Supply Components: This includes all allowances auctioned by member states and those allocated for free to industries.
• Demand Components: This consists of the verified emissions from all installations covered by the EU ETS, for which an equivalent number of allowances must be surrendered.

MSR Trigger Thresholds

1. If TNAC > 833 million: The market is considered oversupplied. A set percentage (currently 24%) of the TNAC is withdrawn from future auctions and placed into the MSR, reducing supply.
2. If TNAC < 400 million: The market is considered tight. 100 million allowances are released from the MSR and added to future auctions to increase supply and prevent excessive price shocks.
3. If 400 million < TNAC < 833 million: The market is considered balanced, and no adjustments are made.

Concrete Example

Suppose the European Commission publishes its annual report in May, stating that the TNAC for the previous year was 1.4 billion allowances.

• Analysis: This figure is well above the upper threshold of 833 million, signaling a significant surplus in the market.
• Action: The Market Stability Reserve is automatically triggered. It will remove 24% of 1.4 billion (336 million allowances) from the auction schedules between September of the current year and August of the next.
• Impact for Investors: This action reduces the future supply of European Union Allowances (EUAs), creating greater scarcity. For an investor on a platform like Homaio, this is a bullish signal supporting the long-term value of their carbon allowance assets.