EU carbon prices hit six-month highs as compliance demand intensifies

European carbon prices climbed to multimonth highs in the week ending Sept. 5, as companies rushed to secure allowances ahead of the Sept. 30 deadline, while rising gas prices boosted power sector demand.

EU Allowances were trading at Eur76.05/mtCO2e ($88.87/mtCO2e) at 1253 BST (1153 GMT) on Sept. 5, according to Intercontinental Exchange data, the highest since mid-February.

"I would remain bullish at least for the next two weeks, the main factor being the compliance deadline and the last-minute buyers," said a carbon analyst.

"Industrial clients ... are late with their carbon coverage for the compliance at the end of this month," he added. "September 2024 was in fact a bearish month, and many were hoping for the same this year."

Operators have to surrender allowances based on their 2024 emissions by Sept. 30, marking the end of the yearly compliance cycle in the EU Emissions Trading System.

This year will mark the first compliance deadline for the maritime industry, with the shipping sector now covered by the ETS.

Platts, part of S&P Global Commodity Insights, last assessed prices for the EUA nearest December at Eur75.56/mtCO2e on Sept. 4.

Analysts at BNP Paribas said fundamentals were already beginning to shift from bearish to slightly bullish.

"Last-minute hedging demand will likely emerge ahead of the September surrender date, and Q4 will see the start of winter and higher heating demand, before the balance tightens significantly in 2026 on a significant fall in supply," said BNP Paribas Commodity Strategist Jason Ying.

Gas support

Natural gas prices and compliance buying have supported the carbon market, with the Dutch TTF front-month also posting weekly gains as storage filling levels remain lower than last year as winter approaches.

Gas filling levels across Europe stood at 78.51% as of Sept. 3, according to Gas Infrastructure Europe. This was lower compared to last year, when filling levels stood at 92.53%.

Carbon prices were largely rangebound in the low Eur70s over the summer months, with the holiday period and low demand capping gains.

"Traders [are] rebuilding after the break, most likely looking at tighter supply next year as a reason to do so," said a second carbon analyst.

This was reflected in the most recent Commitment of Traders report, which showed investment funds active in carbon futures hitting multimonth-long net long positions.

"[I] reckon that position will keep on building this week and encapsulate the end of a boring summer in the market," added the analyst.

Investment funds held 31.7 million allowances as of Aug. 29, the longest net position held since March, representing a five-month high.

Looking in the medium term, most analysts expect EUAs to near Eur80/mtCO2e by year-end, supported by strong winter heating demand and tighter supply in 2026.

Analysts at Commodity Insights expect prices to rise to Eur73-78/mtCO2e in the fourth quarter of the year and then to Eur80-84/mtCO2e in the first quarter of 2026 as supply in the EU ETS tightens.

"A modest rebound is anticipated around the Sept. 30 EU ETS compliance deadline, though oversupply and economic slowdown may dampen its impact," they said in a recent report.

In its latest forecast, BNP Paribas estimates EUAs to average Eur79/mtCO2e in Q4 2025 and Eur83/mtCO2e in Q1 2026, respectively.