EU carbon prices retreat from one-month highs as market awaits 2026 allocations

European carbon prices touched a one-month high in the week to Aug. 28 before retreating, as summer liquidity remained subdued.

EU Allowances traded at €82.56/metric ton of carbon dioxide equivalent ($96.12/mtCO₂e) at 1302 BST Aug. 28, according to the Intercontinental Exchange, largely unchanged from the Aug. 21 settlement of €82.61/mtCO₂e. Platts, part of S&P Global Energy, assessed EUAs for the December 2026 contract at €82.36/mtCO₂e Aug. 27.

ICE volumes stayed low throughout the week, funds trimmed long positions, and counterparties awaited regulatory negotiations on the EU Emissions Trading System.

Spain said it had handed out free allowances to industry, but the status of allocations in other European countries remained unclear as data from the Union Registry had not been updated.

"Starting in September, the Commission will publish every two weeks the progress of the distribution of free allocation to industry," a European Commission spokesperson said Aug. 27.

The EC said it was too early to provide figures because the National Allocation Table had only recently been adopted.

"It is now up to the Member States to proceed with the actual allocations," the spokesperson said.

Fund positioning

Financial sector participants cut net long EUA positions to 36.4 million allowances as of Aug. 21, down 5.85% week over week, according to ICE. Funds have reduced net longs in eight of the past 12 weeks, data collected by Platts showed.

Demand for environmental assets has declined amid geopolitical and supply chain tensions. Higher volatility for natural gas and oil contracts has drawn capital into markets with greater perceived returns.

Natural gas prices are at their highest since the start of 2023, rising steadily in recent weeks as the war in the Middle East continues, pushing LNG prices higher globally.

Europe's storage fill remains below previous years' averages, pushing gas prices higher still, though the impact on EUAs has been minimal.

"There is basically no gas-to-coal fuel switching left in the power system, so this can't be a fundamental driver of EUAs," a carbon trader said.

Analysts at S&P Global Energy CERA expect EUAs to range between €80-€86/mtCO₂e from September to December.

The upper end is contingent "on continued Middle East-driven energy strength and a colder-than-normal Q4 lifting gas-for-power demand, while the September auction step-up and any geopolitical de-escalation represent the primary downside catalysts," they said in a recent note.

UK market link

UK carbon prices tracked EU counterparts as the market awaited a timeline for linking their emissions trading systems.

Platts assessed UKAs for the December 2026 contract at £59.06/mtCO₂e Aug. 27, a discount of €13.48/mtCO₂e to the counterpart EUA contract.

The UK said it would delay the expansion of its ETS to the waste sector to an unspecified date. The expansion had been planned for 2028, but regulatory and industry concerns prompted the government to reappraise the plan.

The EU proposed expanding its own cap-and-trade scheme to the waste sector from 2031, gradually increasing obligations to 100% by 2034.

The divergence may prove a sticking point at the summit between the two jurisdictions expected later in the autumn, where discussions are likely to touch on ETS linking.

To link carbon markets, the two sides must negotiate a treaty and align their emissions caps and market rules.