London — EU carbon allowance prices hit an all-time high of over Eur47/mt April 22 as bullish mood continued in the market in the wake of the EU's informal agreement on a revamped 2030 emissions reduction goal.
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EU Allowance futures contracts for December 2021 delivery on the ICE Futures Europe exchange rallied to an intra-day high of Eur47.36/mt ($56.89/mt) April 22, compared with Eur45.91/mt at the close April 21 -- a gain of Eur1.45/mt or 3.2%.
The gains came after the European Parliament and Council reached an informal agreement April 21 to raise the EU's 2030 emissions reduction target to at least 55% below 1990 levels, compared with the previous 40% goal.
The tougher targets are expected to translate into tighter annual carbon caps out to 2030, reducing the supply of carbon allowances for the operators of power plants, factories and airlines.
The higher carbon prices are also expected to drive the economics of electricity generation by putting further pressure on profit margins from emissions-intensive coal-fired power plants.
"Coal and gas generation has been relatively high so far in 2021, primarily due to weather factors including lower wind vs last year," said Glenn Rickson, manager of European power analysis at S&P Global Platts Analytics.
"But we see significant downside to emissions in western Europe for the summer, based on an assumption of normal wind and solar load factors as well as a recovery in French nuclear power output vs last year's historic lows and considerable renewable capacity growth in markets such as Spain," he said April 22.
Cross border power flows
The higher EU carbon prices can also play into the dynamic between EU and UK power, with trading in the new UK carbon market set to start May 19.
"The strength in EUAs has implications for power border flows too -- not only in Central and Northwest Europe, where the German net position is heavily influenced by the relative cost of coal vs gas -- but also potentially in UK flows," said Rickson.
Historically the UK cost of carbon for generators has been priced at a GBP18/mt premium to EUAs to reflect the Carbon Price Support -- a carbon tax on UK power generation, he said.
"But the continued surge in the EU ETS poses questions for what -- if any -- premium the UK will be priced at following the launch of the UK ETS next month," he said.
"And that's of particular concern with two new UK interconnectors launching in 2021 and another two due online by 2023," he said.
December 2021 EUA futures eased back from the all-time highs to trade at Eur46.85/mt by 16:29 BST (1529 GMT) April 22, up 94 euro cent from the close on April 21.
Climate policy took center stage April 22 as the US hosted a summit where President Biden announced that America will target a greenhouse gas reduction of 50-52% below 2005 levels by 2030, compared with the previous 26-28% target.
The new target also builds on the president's existing goal to create a carbon-free power sector by 2035 and achieve a net-zero emissions economy by no later than 2050.
The new EU and US targets came ahead of the COP26 United Nations climate talks hosted by the UK in November, where countries are expected to raise their voluntary climate pledges and thrash out the rules of an international market for emissions reductions between governments.