EU carbon prices hit new highs after contract rollover, UKAs rally on political commitments

EU carbon prices hit fresh highs over the week ending Dec. 19, following the rollover of the nearest December contract, while the annual auction pause and long builds from financials added support.

EU Allowances were trading at Eur86.57/mtCO2e ($101.42/mtCO2e) at 1010 GMT on Dec. 19, according to Intercontinental Exchange data, up 0.6% from Dec. 12.

Platts, part of S&P Global Energy, assessed the nearest December EUA price at Eur86.22/mtCO2e on Dec. 18, the highest price for the rolling contract since Aug. 23, 2023.

The December 2026 contract took over as benchmark early in the week, after December 2025 expired at Eur85/mtCO2e, a two-year high.

The final auction of the year took place Dec. 15, with a three-week pause now supporting prices in the short term. Auctions will resume Jan. 7, 2026, with Poland adding 1.5 million allowances to the market.

The European Commission has published rules over the past week operationalizing the bloc's Carbon Border Adjustment Mechanism, including the release of provisional benchmarks and default values.

Further rules were also published to expand CBAM to downstream steel and aluminum products in 2028 and to overhaul technical rules for electricity imports to better incentivize global decarbonization efforts.

Tighter market

In 2026, more allowances will be withdrawn from circulation as the Market Stability Reserve reduces the number of permits in circulation. Analysts at S&P Global CERA forecast a negative supply balance of 125 million allowances next year.

"'The MSR will quickly tighten the market, while the reserve is already full," they said in a recent market note.

The sentiment was echoed by other market watchers. Antonello Zanfardino, a senior carbon analyst at BRS Shipbrokers, told Platts the supply narrative is likely to continue supporting prices.

"We believe that carbon has not finished its bull run yet as the supply-demand balance of the European ETS will tighten next year," said Zanfardino.

The total volume of allowances sold in auction should drop from 588.73 million EUA in 2025 to about 482.35 million EUA in 2026, he added. This is based on the 2026 EEX auction calendar and a 24% withdrawal rate of the Market Stability Reserve from September to December 2026.

"We also expect another drastic reduction (around 40%) once the frontloading of auction volumes to help finance the RePowerEU plan ends," he added.

Next year, the ETS will expand its coverage to fully include shipping in the EU ETS. Free allocations to the aviation sector will be fully phased out, and CBAM will enter its definitive phase, which translates into a gradual reduction in the free allocation for iron and steel, cement, aluminum, fertilisers, electricity and hydrogen.

Financial players are front-running the tighter balance, with Commitment of Traders data showing that investment funds hold record length in the carbon market. Funds held 114 million allowances as of the week ending Dec. 12, a third consecutive historical high.

UKAs rally

UK Allowances surged over the week as the spreads to EUAs narrowed by around 37% to Eur12.38/mtCO2e after the EU and UK said they would finalize linking negotiations before the next bilateral summit, which is expected in spring next year.

UKAs were trading at GBP64.99/mtCO2e ($86.96/mtCO2e) as of 0856 GMT on Dec. 19, according to Intercontinental Exchange data, up 11.5% from Dec. 12.

The UKA discount had widened to Eur20.12/mtCO2e earlier in the week, as market participants started to unwind positions due to a lack of policy news surrounding the linking negotiations.

"In some respects, UKAs haven't had their own story for some time. It's basically been a spread trade," said a UK-based carbon trader. "I think that was just as traders lost interest in UKAs because why buy a commodity that's simply tracking EUAs."

The EU and the UK agreed to link their respective ETSs during a summit held in May. The Trade and Cooperation Agreement, signed in the aftermath of Brexit, requires the two jurisdictions to hold yearly bilateral meetings. No date has been set for the upcoming summit, but sources said that it will take place in the spring.

British importers will not be exempt from the bloc's upcoming emission levy, the EU said earlier this week. But linking would mean CBAM obligations would be waived for imports coming from a country with a joint ETS, as is the case for Switzerland.

Platts assessed the nearest December UKA price at GBP64.71/mtCO2e on Dec. 18. The price of carbon paid in the UK will be discounted from final CBAM costs for covered goods from the UK, but importers will have to pay the remaining EUA premium.