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EU carbon prices hit all-time high of Eur34.25/mt as phase four starts


Bullish mood as new 10-year trading phase kicks in

Temporary auction supply pause lifts market

Wider markets see gains after Brexit deal

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  • Frank Watson
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  • Alisdair Bowles
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London — EU carbon allowance prices hit an all-time high of Eur34.25/mt ($41.37/mt) Jan. 4 as the fourth trading phase of the EU Emissions Trading System got under way.

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The surge to fresh highs came amid an ongoing halt to fresh supply entering the market from daily auctions, as well as relief over the Brexit deal reached Dec. 24 which avoided the worst-case economic scenarios materializing for Europe.

EU Allowance futures contracts for December 2021 delivery on the ICE Futures Europe exchange pushed up through the Eur34/mt mark for the first time ever Jan. 4, compared with Eur32.72/mt at the close Dec. 31.

The market continued to lack fresh supply from auctions until daily sales resume on Jan. 29, driving additional interest in the secondary markets.

Aside from short-term supply factors, prices also took strength after the UK and EU reached agreement on the Brexit deal Dec. 24. The agreement avoids a scenario in which further trade disruption would add to economic woes across Europe caused by the coronavirus.

In addition, the latest factors come against an already bullish backdrop for carbon prices, as the fourth trading phase started, which is expected to tighten supply further.

"The extremely tight EUA supply adjustments that soon are to come, will raise the question of how new large-scale abatement opportunities are to emerge," said analyst Espen Andreassen at energy services company Volue Insight, previously Wattsight.

"Carbon prices surely need to climb to high levels to trigger the necessary abatement, so we will have high carbon prices for long," he said Jan. 4.

Stronger EU emissions reduction targets for 2030 are set to play out into tighter annual carbon caps under the EU ETS as well as other changes already legislated, such as more targeted free allocation for companies in the industrial sectors.

A tighter market overall has prompted questions over where the next major CO2 abatement will come from, in the wake of major switching from coal to natural gas and renewables for power generation which characterized the system's third trading phase from 2013 to 2020.

"Hard coal/lignite to gas switching does not take us far, and renewables targets are already extremely ambitious, so industrial abatement of various kinds must be triggered. Hydrogen is immature, and looking at a ten year timeframe, it holds limited GHG reduction potential," said Andreassen.

"Looking at our assumptions of 2019 total GHG emission figures for EU27+UK, [economy-wide] emissions from this area need to fall by some 1,300 million tons CO2 equivalent in a matter of a decade to achieve 55% target compliance by 2030," he said.

The EU ETS covers just over 40% of the EU's total GHG emissions, meaning the reductions it would need to achieve would be proportionally smaller than those for the whole economy.

However, S&P Global Platts Analytics cautioned that the withheld carbon allowances from delayed auctions are likely to add downward price pressure once they begin entering the market on Jan. 29.

"2021 prices will also be moderated by ongoing demand-side weakness and the large surplus overhang from 2020," Platts Analytics said in its monthly EU ETS market outlook dated Dec. 15.

Platts Analytics latest forecast points to EUA prices at Eur30.00/mt by December 2021, rising to Eur34.20/mt by December 2022.

Wider market benchmarks also saw gains Jan. 4 with Brent crude futures trading up in a range of $51 to $53 per barrel, and major stock market indices also moving significantly higher compared with closing values on Dec. 31.

EUA futures for December 2021 delivery on ICE came off the earlier highs later in the day and were quoted at Eur33.64/mt by 16.17 GMT Jan. 4, up 92 euro cent from the close Dec. 31.