EU carbon permits inch closer to Eur90/mt despite mixed signals

Carbon prices under the EU Emissions Trading System made modest gains his week despite mixed technical signals amid some signs that demand was returning after a string of strong auction results.

EU Allowances under the December 2023 contract were trading at Eur89.26/mtCO2e at 0920 GMT on May 12, having settled at Eur84.96/mtCO2e on May 5, ICE data showed.

Platts, part of S&P Global Commodity Insights, assessed EUA contracts for December delivery at Eur88.51/mtCO2e on May 11.

Compliance demand, which had taken a hit after the April 30 deadline to surrender allowances, was beginning to rebound as demonstrated by strong bidding interest in this week's auctions.

In a recent note, analysts at carbon trading company Belektron said that buyers were showing more appetite and a technical breakout to the upside was pushing prices closer to Eur90/mt.

But they noted that market sentiment does not appear to be overtly bullish, due to a weakening European economy and high inflation.

"EUAs could therefore remain rangebound, with sudden moves in both directions, until major news or change starts a new trend," they said.

High coal to gas switching was also weighing on the market as demand for EUAs from the power generation sector was largely subdued.

Analysts at S&P Global now expect carbon prices to average Eur81.1/mtCO2e in 2023 and Eur85.1/mtCO2e in 2024.

"High carbon prices will support coal-to-gas switching between May and September, and the coming months will bring clarity around plans to increase EUA auction supply under the EU REPowerEU initiative," they said in a recent note.