Tuesday, 31 August 2021
On Monday (30 August 2021), the EU carbon price reached new heights amid prospects of much tighter environmental regulations and a brief reduction in supply which according to the Financial Times led to a new market record of above €60.
The European Union's (EU) futures carbon price passed €61 ($72.16) in intraday trading yesterday which was double the price levels witnessed a year ago, before falling back close to €60.76 ($71.96).
The EU compliance market, also known as the EU Emissions Trading System (EU ETS), is the world's first international emissions trading system that trades in credits (allowances). These credits are a financial instrument that allows the owner permission to emit one tonne of carbon dioxide. The EU requires most large producers including most coal power plants to purchase enough allowances to cover their emissions.
According to Ingvild Sorhus, lead analyst for EU carbon at Refinitiv, one of the factors behind the recent carbon price surge was the anticipation of tight gas supplies in Europe.
"As autumn arrived, high gas prices could mean that more coal was burnt for power and heat this winter, creating greater demand for carbon allowances to cover the resulting emissions, said Sorhus via the Financial Times.
Ms. Sorhus added that the recent carbon price increase was further driven by a stressed gas market where there are uncertainties and concerns as Europe heads into winter with insufficient gas supply.
Additionally, there will be a brief reduction in supply this week because of a reduction in the regular schedule of auctions where new allowances are released into the market due to holidays. This means fewer new carbon allowances will be available in the market than normal which could've triggered the carbon price increase.
EU carbon prices have continued increasing since the beginning of this year from a little over €30 per tonne in January to over €40 per tonne in March then steadily increasing and remaining between €50-58 from May until most of August before passing the €60 mark yesterday.
The EU carbon market has been experiencing an unprecedented escalation in prices this year. According to Sorhus, the carbon price has set new records approximately 40 times this year. The EU ETS is expected to play a major role in the bloc's emission abatement and 2050 carbon neutrality goals.
According to an annual Carbon Market Survey by Refinitiv published earlier this year, the increasing carbon prices and subsequent cost of emitting in Europe are increasingly influencing investment decisions while a majority of survey respondents (mainly traders and regulated emitters) believe that EU carbon prices will continue to rise this year. While analysts at Refinitiv speculate that prices could reach €89 by 2030 other market players have even more bullish outlooks with some speculating that prices could reach €100.
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