EU carbon prices sink to 11-month low on market turmoil

London — EU carbon allowance prices sank to an 11-month low Friday, with confidence taking a major hit after a week of turmoil in the wider financial markets and a collapse in crude oil prices.

EU Allowance futures contracts for December 2020 delivery on the ICE Futures Europe exchange fell as low as Eur21.75/mt ($23.75/mt) Friday, compared with Eur23.42/mt at the close a week ago, March 6.

"It's difficult to see this afternoon's price drop as anything but a symptom of coronavirus, tied to both wider market drops and the very real possibility that power sector EUA demand could come in even lower than what we were originally expecting, as discussed in our March 12 Platts Analytics EU ETS Outlook," said Jeff Berman, director of emissions and clean energy at S&P Global Platts Analytics.

Apart from a brief upward move in early deals Friday, it was one-way traffic with EUA prices sustaining heavy losses through Friday's trading session, taking prices down to their lowest since April 2019.

Carbon prices have performed relatively well against many other commodities so far this year, particularly against a backdrop of Brent crude prices falling from well over $60/b at the start of the year to as low as $33/b this week in the wake of major producing countries failing to agree output curbs.

Carbon's stability had been remarkable over the last 18 months, despite so much downside pressure from declining Dutch TTF gas prices, record coal-to-gas fuel switching and more recently the massive drop in crude prices, Berman said Friday.

However, the financial markets went into freefall during the week to March 13 as investors worried over the economic impacts of the coronavirus. The double hit of weaker energy markets and collapsing equities put too much pressure on carbon prices, sending the benchmark December 2020 contract to new lows by Friday.

December 2020 EUAs were trading at Eur21.94/mt by late afternoon Friday, just off the intra-day low.

Looking ahead to the week starting March 16, an expected drop-off in wind availability in Europe may provide a moderately bullish note for EUA demand, as marginal coal- and gas-fired plants would be expected to come back into the merit order for power generation.

However, the usual factors providing price direction are likely to be overshadowed by macroeconomic conditions, with all eyes on the spread of the coronavirus for signs of its economic impact.

On the policy side, the UK government is expected to propose legislation setting out a domestic carbon market and carbon tax policy on Thursday, which may provide more detail on the shape of the UK's carbon pricing framework after the country leaves the EU ETS on December 31, 2020.