EU carbon spikes to near 9-month high intraday on supportive gas

European carbon prices reached their highest levels since mid-January in the afternoon of Oct. 12 amid a rally in natural gas prices and expectations of lower-than-normal wind generation.

Allowance prices hit €88.82/metric ton of CO2 equivalent ($99.10/mtCO2e) at 1305 BST Oct. 12, before retreating. This was the highest EUA price since Jan. 16, a near nine-month high.

However, prices retreated by market close as policy risk and low volumes capped previous gains. Platts, part of S&P Global Energy, assessed EUAs at €87.87/mtCO2e at 1630 GMT on Oct. 12%, up 0.92% day over day.

Market participants said that expectations of reduced wind speeds and lower power generation throughout Europe were contributing to the intraday spike.

"The latest weather forecast sends supportive signals to carbon," said Ingvild Sorhus, head of EU analysis at Veyt, in a market note. "German wind speeds are largely expected to be below normal levels, which should leave more room for thermal generation in the power mix."

Sorhus added that temperature forecasts were not a strong price driver during this period due to limited heating demand.

"Conventional power generation will likely need to increase," said Antonello Zanfardino, analyst at BRS Shipbrokers. This, he said, was "supporting EUA demand and providing a bullish signal for carbon prices."

A stronger gas complex also contributed to the rally. The Platts Dutch TTF front-month was assessed at €83.93/megawatt-hout Oct. 12, up 2.82% day over day.

Storage levels stood at 73.61% full as of Oct. 11, according to Gas Infrastructure Europe, 9.26 percentage points below the same level at the same time last year.

"Concerns over potential disruptions to global LNG supplies, driven by the Middle East conflict and the very low gas storage levels in the EU continue to support gas prices," Zanfardino said. "Should these supply risks persist, they could keep gas prices elevated and, given the positive correlation between gas and carbon, provide continued support to carbon."

Higher gas prices can increase incentives to switch to more emissions-intensive fossil-fuel-based power generation, such as coal, which requires more EUAs due to its higher emissions factor.

ETS policy negotiations continue

The gains come amid increased policy uncertainty as EU leaders meet throughout the week in Brussels to discuss the future of the EU Emissions Trading System, among other climate topics.

The Council of the EU's Environment Council met Oct. 12, where the Irish presidency and the European Commission signaled that a deal on the ETS review remained within reach.

"The key event is the European Council on Oct. 15 to 16, where Italy and Czechia have tabled a proposal to suspend Market Stability Reserve (MSR) intake, roughly 190 million allowances," said Chris Christodoulopoulos, carbon trader at environmental services company Global Factor. "The market seems to be pricing that any outcome from Brussels will be less bearish than feared, but that is binary risk."

Under current rules, the MSR -- a mechanism within the EU ETS that aims to balance supply and demand and improve resilience to major shocks -- will withdraw 190 million allowances from auctions between September 2026 and August 2027.

EU leaders are meeting in Brussels for a two-day summit later in the week, where they will focus on issues relating to European competitiveness, including energy prices.

"A firm signal on the reserve could reverse much of this move quickly, so I'd expect volatility to stay elevated through Thursday and Friday," Christodoulopoulos added.

Policy negotiations surrounding the EU ETS remain the most prominent downside risk for the EUA market, according to market participants.