EU carbon prices fall to 4-month low, UK auctions to restart March 4

London — EU carbon allowance prices fell to a four-month low Monday morning after the European Commission said late Friday that the UK government is expected to resume carbon allowance auctions under the EU Emissions Trading System March 4.

EU Allowance futures contracts for December 2020 delivery on the ICE Futures Europe exchange fell in early deals Monday, dropping as low as Eur23.11/mt ($25.58/mt), down from Eur23.88/mt at the close Friday.

The long-awaited announcement has been a key factor curbing bullish sentiment in the carbon market, because the UK will sell all of 2019's auction volume this year in addition to 2020 supplies, and the timing of this had been uncertain.

"The auctions of general allowances are expected to restart on March 4, 2020," the EC said in a statement after the markets had closed Friday.

"The auction volumes for the calendar years 2019 and 2020 will be spread over the UK auctions that will take place in 2020," it said.

The announcement came soon after the UK and EU ratified the former's withdrawal agreement from the bloc in late January, which entered into force Saturday, allowing the EC to lift a suspension on UK carbon auctions that had been in place since January 2019.

The agreement ensures that UK-based operators of power plants, factories and airlines remain subject to the EU ETS compliance obligations for carbon dioxide emissions in 2019 and 2020.

In addition to the return of the UK's carbon auctions, free allocation of about 60 million mt of allowances was also held back in 2019, and this is expected to be given to UK industrial sectors imminently, with 2020 free allocation expected to take place in February as normal, according to carbon market sources.

The news means two years worth of the UK's free allocation and two years worth of auction volumes are expected to enter the market in 2020, raising the overall supply of allowances compared with 2019.

In addition, 50 million mt of EUAs are set to be added to EU common auctions this year to fund the EU's Innovation Fund, and these volumes remain suspended until the EC has finalised arrangements for monetizing them. Once the EC announces a start date, these volumes are set to be spread evenly through the remaining EU auctions in 2020.

Bearish sentiment has dominated the EU carbon market since the start of the year, amid cheap natural gas prices in Europe and an unusually mild winter so far this year, which has curbed heating demand, reducing CO2 emissions from power generation. Furthermore, EU member states give out free allowances to industrial sectors each February, with the volume estimated at 700-800 million mt in total this year, according to S&P Global Platts news. This factor can contribute to price weakness in the first quarter.