EU carbon prices in freefall as panic spreads

EU carbon allowance prices collapsed further March 2, falling to a four-month low and compounding recent losses as the conflict in Ukraine spooked the market, prompting a wave of selling.

EU Allowance futures contracts for December 2022 delivery on the ICE Endex exchange fell as low as Eur55/mt CO2-equivalent ($60.99/mt) in the morning trading session — a level not seen since October 2021. That compared with Eur68.85/mt at the close March 1.

The latest drop followed a rapid price collapse since Feb. 23, with prices having lost Eur40/mt, or 42%, in the space of five days.

Russia's invasion of Ukraine, which began Feb. 24, triggered uncertainty in the wider energy markets and appeared to prompt financial participants to sell out of positions in the EU Emissions Trading System.

S&P Global Commodity Insights compliance carbon markets analyst Michael Evans March 1 said the uncertainty over the Russia/Ukraine conflict appeared to prompt financial participants to liquidate positions.

Unlike compliance buyers such as electricity generators, refineries, airlines, and metals producers, banks and hedge funds are non-emitters and are not required to surrender allowances each year, making them the first to bail out in times of extreme uncertainty.

Germany's Commerzbank said the drop in carbon prices was "remarkable" given that European gas prices have soared nearly 30% at the same time due to the conflict in Ukraine.

"Though fundamental factors cannot explain such a price collapse, it is certainly possible to identify aspects that weighed on prices," Commerzbank said in a research note March 2.

"For one thing, a looming energy crisis raises the risks in particular for those energy-intensive industries registered in the EU ETS," the bank said.

"And one cannot ignore the fact that coal, as well as gas, has risen massively in price. Russian hard coal is important not only in Europe; there is now talk of the Chinese, who have likewise been relying increasingly on Russian coal imports of late, looking for alternatives due to possible financing problems," it said.

While market participants are likely to remain nervous for the foreseeable future, Commerzbank is confident that EU carbon prices are "well supported" given the long-term tightening of the market through regulation, it said in the note.

Budapest-based financial broker Vertis Environmental Finance said several factors lay behind the sudden price drop.

"The level of uncertainty about the general economy, an anticipated energy crisis, and the distribution of 2022 free allocations were all factors that put downward pressure on the price," the broker said in a statement March 1.

Investors were also pulling out of carbon-related exchange-traded funds, adding to the losses, Vertis said.

"The fund withdrawals are a sign that investors are pulling away from relatively risky assets to more secure investments or safe-havens," the company said.

December 2022 EUA futures prices had rebounded above Eur67/mt by late afternoon March 2.