EU carbon rally pauses, prices hover near Eur75/mtCO2e

European carbon prices rose sharply in the week to May 24, supported by a rallying gas complex and better demand from the industrial sector.

EU Allowances rose almost Eur7/mtCO2e ($8//mtCO2e) to almost Eur77/mtCO2e at one stage but fell to near Eur75/mtCO2e on May 24 on weaker auction results. EUAs were trading at Eur74.49/mtCO2e late in the morning, ICE data showed.

Platts assessed EU Allowance contracts for December delivery at Eur76.11/mtCO2e on May 23, down from Eur76.73/mtCO2e the previous day when they were at the highest level since Jan. 3, according to S&P Global Commodity Insights data.

Carbon prices have been tracking European natural gas in the past few months, and that correlation has only intensified.

"Despite hedge funds having slightly increased their net short positions on the market last week, we are definitively in bullish territory when it comes to the price action and, until the gas market stabilizes itself, this upward momentum will persist considering the substantial correlation coefficient factor existing between TTF and EUA prices," said Gregory Idil, a senior carbon broker.

Platts assessed the Dutch TTF day-ahead contract at Eur35.50/MWh on May 23, a level not seen since Dec. 11, due to supply concerns.

News about the potential halt of Russian gas imports to Austria and unplanned maintenance at some Norwegian gas assets were driving TTF values.

Traders and analysts said demand from the industrial and power generation sectors were showing signs of resilience.

"If this was not enough, you must also add the surging demand streaming from industrial actors who prepare themselves for the surrendering deadline of September 2024 and who see current prices as relatively attractive in comparison to the Eur100/mtCO2e that they had to face last summer," Idil said.

But there was also some skepticism if prices will continue to rise further as fundamentals have not turned bullish yet and investors are still increasing their net short positions.

Auctions results were also bearish on May 24, with 2.31 million allowances cleared at the German auction at Eur72.80/mtCO2e compared to Eur74.90/mtCO2e at the EU auction the previous day.

Strong recovery on UKAs

UK carbon prices rose to their highest since Jan. 3 on strong buying interest.

Platts assessed UK Allowances at a four-month high of GBP44.51/mtCO2e ($56.57/mtCO2e) on May 23.

On May 23, the UK government launched a consultation as looks to include greenhouse gas removals (GGRs) or carbon removals in its emissions trading scheme.

The consultation, which ends Aug. 15 -- by when a new government should be in pace after the July 4 election -- is split into five areas: principles for policy design, details on the cap, allowance design, permanence and the pathways to integration.

The UK ETS Authority said 2028 was the earliest feasible integration date for removals though a decision on timing has not yet been made.

"The supply of GGRs will be related to a number of factors that will affect some engineered removals deployment in the UK, including dependencies on the CCUS cluster program for some engineered GGR technologies, and deployment of GGRs via business models," it said in a document.

The authority also said it was seeking to gather feedback for expanding the UK ETS to the waste sector from 2028.

Meanwhile, the UK government said May 21 it will hold firm on its climate goals despite outperforming on its recent emission targets.

The Department for Energy Security and Net Zero said it will not carry forward the surplus from its third carbon budget after it overachieved in delivering its legally binding emissions target by 15% between 2018 to 2022.