EU carbon prices surge above Eur80/mt for first time

EU carbon prices topped the Eur80/mt mark for the first time ever Dec. 3, with market sources pointing to upcoming options expiry as a major factor in the latest gains.

EU Allowance futures contracts for December 2021 delivery on the ICE Endex exchange rallied to a new all-time high of Eur80.42/mt ($90.72/mt) Dec. 3, compared with Eur72.78/mt at the close Nov. 26.

Technical factors have propelled prices higher, combining with already bullish fundamentals including high natural gas prices and ongoing legislative reforms to align the EU Emissions Trading System with the EU's tougher 2030 climate targets.

"We have reason to believe that part of the increase can be explained by the activity of call options sellers," said carbon analyst Bernadett Papp at Vertis Environmental Finance.

"The two strikes with the highest open interest are Eur80/mt and Eur100/mt right now. I can imagine that somebody sold a call with an 80 strike in the past thinking the price would not reach that level, but when the market traded at Eur75-76-78, they started 'panicking'. The options expire in less than two weeks' time," said Papp.

Dec 2021 EUA options contracts on the ICE Endex exchange are set to expire on Dec. 15, while Dec 2021 futures will have their last trading day on Dec. 20.

Traders who sold those options contracts would need to buy enough allowances to fulfil their obligations if market prices went above the call option strike price. This so-called options delta hedging may have prompted a scramble among options sellers to buy EUA futures, driving the extreme price spike in the week ending Dec. 3.

Fundamentals keep market supported

Aside from technical factors linked to options contracts, fundamentals continued to support EU carbon prices.

"It is worth mentioning that we just entered the hard part of the winter and due to the high gas prices, it is much more profitable to burn coal. But coal is emitting almost double the CO2 when producing the same amount of power," said Papp at Vertis.

"Power companies therefore also line up on the buyers' side. Although from the technical analysis point of view the price is overbought, the above factors keep buyers active in the market," she said.

S&P Global Platts Analytics also highlighted the strong technical buying that has driven carbon prices higher, with total open interest for EUA call options on the Dec 2021 contract seen as high as 340 million mt, which is 150 million mt higher than the Dec 2020 contract.

"This strong activity in call options could have clear implications for underlying futures prices, should continued gains in call option OI [open interest] lead to additional buying of EUA futures as a hedge," Platts Analytics said in a report Dec. 1.

Further support for prices came from measures announced by Germany's new coalition government Nov. 24 to align the country's decarbonization pathway to 1.5 degrees C.

Germany's new coalition announced it wants to implement an EU ETS "price floor" of Eur60/mt if the EU does not establish one. While such an approach does not currently exist within the EU ETS rules, it does highlight Germany's political determination to send robust price signals through the EU carbon market as well as through domestic policy.

"Germany is a major emitter in the EU, accounting for over a quarter of the bloc's emissions," Platts Analytics said in the report.

"Any further developments towards setting a price floor in Germany will continue to generate short-term market speculation for EUA prices," it said.

However, given that the current EUA price is already well above the proposed Eur60/mt floor price, long-term market behavior is not expected to change significantly in the wake of Germany's proposals, Platts Analytics said.