EU carbon prices surge to 14-year high

The price of allowances in Europe's carbon market surged to a 14-year high on Monday, as the promise of 'green recovery' climate policies across the EU helped prices breach the €30 per tonne-mark for the first time since 2006.

Prices on the EU's Emissions Trading Scheme (ETS) have experienced a steady increase over the past two years, hitting an 11-year high of €28 per tonne last summer, following reforms aimed at reducing the number of free pollution permits in the market.

The rising cost of pollution has had a major knock-on impact on carbon intensive firms in Europe, eroding the economic case for coal fired power plants in particular.

Going in to the coronavirus crisis, the price of EU Allowances (EUAs) stood at just under €24 per tonne, but as lockdown measures kicked in across Europe in March to fight the COVID-19 outbreak, prices fell sharply as plummeting energy use from factories and businesses led to lower emissions and reduced demand for carbon allowances.

Now, however, with the EU Commission having set out plans for a €750bn economic recovery package with a major focus on furthering its European Green Deal ambitions to become the world's first net zero continent by 2050, many analysts believe ETS traders are anticipating tighter climate policies and pushing up demand for EUAs.

Investors have sought to snap up CO2 credits in recent weeks and months in the belief that future prices could go even higher, sending the price soaring once again to over €30 a tonne yesterday.

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During yesterday afternoon's trading, prices even came within 20 cents of the all-time high set in April 2006 of €31 per tonne, according to the Financial Times.

Mark Lewis, global head of sustainability research at BNP Paribas Asset Management, told the newspaper the strength of the EU ETS price had been "remarkable", but warned that prices could once again fall if big industrial firms began to sell their credits, or if lockdown restrictions were re-imposed.

There are also growing concerns in the EU about continued price volatility in the ETS, and some analysts believe further reform of the market to help reduce the surplus of carbon credits - partly built up in the system from historic oversupplies - could be on their way in the near future.

Euan Ker, sustainable investment analyst at Kames Capital, said changes made to the ETS in the past had previously led to increased CO2 permit prices, and that this could occur again, particularly given the European Commission's commitment to driving a 'green recovery'.

"The European Commission has sensed an opportunity to support a low carbon recovery from Covid-19, with their €750bn recovery fund proposal setting aside 25 per cent of all funding for climate action, and highlighted as being greener than any individual country's fiscal package," he said.

"Higher carbon prices provide far more incentive for businesses to switch to greener production and reduce their emissions, so we view the current price level as a positive."

Higher carbon prices typically lead to higher costs for fossil fuel energy, improving the economics of clean energy sources and energy efficiency upgrades.

Critics of the ETS have warned that higher prices could encourage some industries to migrate to regions without catrbon pricing regimes in place. However, official studies from the EU have revealed negligible evidence of so-called 'carbon leakage', while a system of free allowances is designed to address competitiveness concerns for those industries at risk of being undercut by overseas competitors.

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• Topics
• Carbon Trading
• Emissions Trading Scheme
• ETS
• eu commission
• EU ETS
• European Green Deal