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EU CO2 price hits three-month high ahead of year-end auction pause

London — EU carbon dioxide allowances rallied to a three-month high Friday, ahead of the December 2018 contract's expiry on Monday and with only one carbon auction left this year before a three-week break in primary supply.

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EUA futures for December 2018 delivery on the ICE Futures Europe exchange hit Eur23.82/mt ($26.9/mt), which was the highest intraday price since September 12 and up from Eur22.32/mt Thursday.

Monday's carbon auction will be the last until January 7, which will be the first affected by the Market Stability Reserve, with daily common EU auction volumes cut to 2.495 million mt, down 40% from 4.213 million mt/day in 2018.

Meanwhile, Poland's auction plans were unveiled this week, showing that the twice-monthly sales will offer 4.4295 million mt each, starting January 16.

Meanwhile, Germany's sales remain on hold until some time in the first quarter, pending a renewal of the EEX license to host the auctions on behalf of the government. Moreover, December 2018 EUA options contracts expired on Wednesday.

There had been some concern in the market about price volatility linked to the expiry, and clearing that hurdle appeared to inject fresh momentum at the end of the week.

"The weekly gain now stands at more than 16% following December EUA options expiry that had been keeping a lid on prices in recent weeks," senior trader Tom Lord at London-based carbon advisory firm Redshaw Advisors said Friday in a note to clients. "The market had approached the options expiry with caution. But the lack of downside following the expiry had led to a rush of buying as traders look to get ahead of the upcoming auction shutdown over the Christmas period," he said.

"Today's gains are exacerbated by the absence of the usual German EUA auction. With just one auction remaining in 2018 and the Q1 2019 auction calendar severely curtailed by the MSR and lack of UK and German auctions, the risk of further price rises and extreme price spikes very much comes into focus."

December 2018 EUA futures on ICE and EEX will have their last trading day on Monday, and open interest figures on ICE this week showed traders have continued to roll their positions forward into the December 2019 contract.

The rise in carbon prices has contributed to pushing clean dark spreads lower relative to equivalent gas-fired margins.

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That relates to the 'early efficiency' coal-to-gas switching price, with the German year-ahead CSS for 50% efficiency gas-fired plants moving close to parity with the equivalent margins for lower 35% efficiency coal-fired units this week.

--Frank Watson, frank.watson@spglobal.com

--Edited by Daniel Lalor, newsdesk@spglobal.com