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EU carbon auction clears at record high price

Highlights

Carbon auction tops Eur40/mt for first time

EUA futures hold at recent highs

Milder temperatures to move across Europe

London — An auction of carbon allowances under the EU Emissions Trading System cleared at an all-time high of Eur40.19/mt ($48.87/mt) Feb. 16.

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The sale of 3.2885 million allowances by a group of EU countries cleared at the highest auction price so far seen since the EU ETS launched in 2005, according to data from auction host the European Energy Exchange.

The latest record came as the secondary market for EU carbon allowances on exchanges also saw prices reach record levels in recent days.

EU Allowance futures contracts for December 2021 delivery on the ICE Futures Europe exchange traded in a range of Eur39.13/mt to Eur40.53/mt Feb. 16 – close to record highs – compared with a close of Eur39.52/mt Feb. 15.

Carbon prices have moved sharply higher in February, taking support from unusually cold weather in Europe which has pushed natural gas prices higher, raising the implied carbon price needed to prompt a switch from coal to gas for power generation.

The gains have come during a year when daily carbon auctions were delayed until late January and annual free allocation of carbon allowances – expected to be around 600 million mt – has also been delayed until the second quarter from the usual February timing, contributing to short-term tightness in supply.

Price dips have also found strong support, reflecting bullish mood in the market ahead of June when the European Commission is expected to propose legislation to tighten the annual supply of allowances to align with the EU's revamped climate goals for 2030 as well as proposals to expand the system to cover CO2 emissions from shipping.

However, the recent carbon price gains are exposed to potential downside risk, according to S&P Global Platts Analytics, notably from an expected end to the cold snap in Europe, returning nuclear generation and the passing of the annual compliance period. Companies regulated under the EU ETS have until April 30 to hand over EUAs to match their verified CO2 emissions in 2020.

Milder weather conditions were moving east across Europe from the Atlantic Feb. 16 and these conditions were set to spread across most of continental Europe by Feb. 20, according to CustomWeather forecasts, in a clear bearish signal for short-term energy demand. In addition, increased wind and rain are supportive for wind and hydroelectric power generation, reducing the pull on thermal generation, suggesting lower CO2 emissions from the electricity sector.