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EU CO2 prices rally above Eur50/mt for first time


Rising natural gas prices drive carbon higher

Market takes support from EU's new 2030 emissions goal

Prices pull back sharply to Eur48.40/mt later in day

  • Author
  • Frank Watson
  • Editor
  • Jonathan Fox
  • Commodity
  • Coal Electric Power Natural Gas

London — EU carbon allowance prices rallied above Eur50/mt for the first time ever May 4, in a volatile session that saw prices fall back sharply later in the day.

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EU Allowance futures contracts for December 2021 delivery on the ICE Futures Europe exchange rose as high as Eur50.05/mt in early deals before abruptly reversing course to fall sharply through the remainder of the day to as low as Eur48.40/mt.

"The Eur50/mt threshold was crossed after the 2020 compliance deadline passed [on April 30]," said Jeff Berman, manager of emissions and clean energy analytics at S&P Global Platts Analytics.

"With that in mind, there is a real possibility that the market could ignore other upcoming bearish drivers, including the arrival of 2021 free allocations and the start of UK ETS auctions that could lead UK entities to unwind EUA hedges," Berman said May 4.

Annual free allocation of allowances is expected to take place for the industrial sectors across Europe by June, while carbon auctions and futures trading in the UK are set to begin May 19.

European natural gas prices made sharp gains in April that increased the implied coal-to-gas fuel switching price for carbon, in a bullish sign for forward hedging demand for EUAs among power generators.

"It is interesting to note that EUAs are currently actually trading below the fuel switching range as calculated from Q3 2021 and Q4 2021 forwards," said analyst Lueder Schumacher at Societe Generale.

"TTF [Dutch] gas has just gone on a tear recently with seasonally low temperatures across Europe," he said in emailed comments May 4.

Other sources agreed that multiple factors had combined to drive carbon prices higher.

Market analysis company Refinitiv said the Eur50/mt milestone means carbon prices have gained 50% since the start of 2021, making it one of the best performing commodities this year.

"Multiple factors have contributed to pulling carbon higher but the EU's decision to raise the 2030 emissions reduction target to 'at least 55% below 1990 levels (from 40%) is the fundamental driver," Refinitiv said in a statement May 4.

"There is also the supporting factor of an exceptionally cold winter and early spring in Europe driving up energy demand and increased emissions from the power sector," it said.

"Carbon has also been supported by a strengthening European gas market which has also posted large gains since the beginning of the year due to tight supply-demand situation and the lowest storage levels since 2018. Rising carbon prices drive up coal-to-gas switching in the power sector," Refinitiv said.

With support of solid confidence in the integrity of the EU ETS, financial investors are increasingly attracted to the market, which has further contributed to fueling the upward move, the company said.

ICE data show that investment funds' positions in EUA futures are at record high levels and non-compliance companies now hold a quarter of the long positions in the EU ETS, Refinitiv said.