EU carbon prices recover as compliance participants buy the dip

European carbon prices posted gains over the week ending Feb. 20, recovering from the nine-month low recorded at the start of the trading week as participants with compliance obligations entered the market.

EU Allowances reached Eur73.56/mtCO2e ($86.57/mtCO2e) at 1144 GMT, according to the Intercontinental Exchange, up by 4% from the Feb. 13 settlement.

The increase comes after EUAs plunged by more than Eur20/mt over the previous weeks amid statements from European officials targeting the EU Emission Trading System, with countries such as Germany, Belgium and Italy calling for reforms.

"I believe the players are thinking that the price is low, so they come in," said an Asia-based trader.

Interest in weekly auctions increased week over week, with the bid-to-cover ratio rising from 1.79 to 1.85 across five auctions, adding 10.8 million allowances to the market, compared to 9.2 million last week, absent the bi-weekly Polish volumes.

Revenues totaled Eur747.5 million, up from Eur698.3 million last week, bringing revenues closer to the targeted Eur20 billion needed for REPowerEU plans.

Price swings

This comes after EUA prices topped Eur90/mtCO2e at the start of the year, with many analysts forecasting further gains on the horizon, potentially nearing Eur100/mtCO2e in 2026.

But political interventions have led to sharp declines, drawing compliance players into the market, multiple market participants and intermediaries told Platts over the trading week.

The EU is scheduled to undertake a review of its compliance market in the third quarter of this year, with items such as free allocation, the Market Stability Reserve and sectoral expansions on the table.

Analysts at S&P Global Sustainable1 said recent events mark a shift toward a more "competitiveness-focused carbon market" with tangible implications for EUA prices.

"From a price perspective, even limited policy loosening could exert downward pressure on EUAs in the near term by weakening scarcity expectations -- particularly if additional supply buffers are released or tightening trajectories are postponed," said Danylo Babkov, a carbon analyst at Sustainable1.

"However, these positions started unwinding quickly after political comments about possible reform or delay of the EU ETS."

Critics of carbon pricing have been vocal over the past few weeks, expressing concerns about declining industrial competitiveness due to high climate costs and calling for softer rules targeting European manufacturers.

Financial players stopped piling capital into the market amid the shift in sentiment as political support for higher prices waned.

This week's Commitment of Traders report published by ICE showed a reduction in positions held by financial players, namely investment funds, totaling 11.6 million EUAs, down 12.3% to 82.4 million in net long positions, the lowest levels held since late-September 2025.

"For the amount of decrease in price, COT is not down enough," said a UK-based carbon trader. "To get to levels before September, we need to drop another Eur15 then. Most of the bets are in the red now."

While other participant categories recorded milder position adjustments, operators with obligations, typically compliance buyers, increased long bets by 2 million EUAs or 3.7% to 56.4 million.

UKAs rise

UK Allowances also posted weekly gains, mirroring the EUA increase while the spread between the two markets remains wide compared to earlier in the year.

UKAs were trading at GBP47.20/mtCO2e ($63.57/mtCO2e) at 1146 GMT, according to ICE, up by 3.7% from the Feb. 13 settlement.

Meanwhile, Platts assessed the spread to EUA counterparts at GBP18.36/mtCO2e on Feb. 19, widening by 6.1% from the end of last week.

But funds active in the UK carbon market increased long bets to 20.9 million allowances, up 9.5% or 1.8 million on the week, despite recent bearishness.

This may signal long-term bullish expectations about linkage with the EU ETS from financial players in UKAs and those positioned across both carbon markets.