UK, EU carbon prices end week higher on ETS linkage news, gas market volatility

European carbon allowances ended the week on a higher note after experiencing gas-driven volatility amid a mix of bearish and bullish signals. UK allowances rose sharply following news that the UK government was considering linking the UK emissions trading system with its European counterpart.

EU Allowances were trading at Eur71.30/mtCO2e ($77.69/mtCO2e) at 1137 GMT March 14, up around 4% from a week earlier, according to Intercontinental Exchange data. Platts, part of S&P Global Commodity Insights, assessed the EUA nearest December 2025 contract at Eur70.055/mtCO2e on March 13.

"Price support factors include continued net long positions by investment funds, anticipated supply tightness in the EU ETS, and geopolitical risks," said Danylo Babkov, a carbon analyst at S&P Global Commodity Insights.

News of a potential ceasefire between Russia and Ukraine emerged earlier in the week following a meeting between Ukrainian and US officials in Saudi Arabia, with later statements by Russian President Vladimir Putin indicating that he was in favor of a potential ceasefire pending negotiations. This weighed on TTF gas prices during afternoon trading on March 13, easing carbon gains.

"A ceasefire would probably include sanctions relief on Russian hydrocarbons, [potentially] increasing the availability of Russian gas," Babkov said. "This greater supply would push TTF prices down. Since EUA prices are influenced by energy prices, a drop in TTF prices would likely lead to a decrease in EUA prices as well."

Market participants continued to follow developments around US tariffs and the wider macroeconomic picture. US President Donald Trump earlier in the week announced increased tariffs of 50% on Canadian steel and aluminum and 25% tariffs for products from the EU.

European Commission chief Ursula von der Leyen later announced countermeasures on US tariffs by re-imposing suspended rebalancing measures from 2018 and 2020.

"[The] retaliatory tariffs imposed by Europe and Canada against US tariffs are likely to further fuel the push for European self-reliance," a carbon analyst based in Asia told Platts, adding that the short term seems "increasingly chaotic".

Speaking about US tariffs, Babkov said their introduction could lead to reductions in EU emissions.

"This is because tariffs can affect trade flows, production levels and economic activity, which in turn influence emissions," he said. "Analysts estimate that new tariffs could reduce EU emissions by 1.45 million-24.66 million mt/year, resulting in a cumulative decline of 90.31 million mt over several years."

Another analyst based in the UK said the carbon market remains unpredictable.

"[The price] depends on temperatures in the coming days and how much pressure this puts on gas storage," the analyst said. "General sentiment remains bearish. The EU economy is undergoing tariffs left, right and center and there is still some prospect of a ceasefire [between Russia and Ukraine]."

UKAs up 13%

UK carbon prices rallied on news that the UK government was considering linking the UK emissions trading system with its European counterpart.

"This rally led to a short squeeze among algorithmic traders, further driving up prices," Babkov said.

UK Allowances were trading at GBP44.50/mtCO2e ($57.58/mtCO2e) at 1137 GMT March 14, up around 13% week over week, according to ICE data. Platts assessed UKAs for December delivery at GBP42.94/mtCO2e on March 13.

"[It is] hard to grasp why someone reiterating linkage news has had this much of an impact," a UK-based carbon analyst told Platts.

Consequently, the spread between the Platts EU and UK respective nearest December carbon prices has been narrowing, assessed at Eur18.885/mtCO2e March 12, tighter by Eur1.535 week over week.

UKA prices rallied as much as 30% over one week at the end of January, after media reports that the UK was eyeing a potential linkage to the EU ETS.

Analysts previously said that a linkage would be a lengthy process, drawing parallels to the linkage with the Swiss ETS, which took 10 years to finalize.

Speaking on the potential price impact of the linkage on EUAs, the analyst said that "the UK re-joining the EU ETS could have bearish pressure as additional allowances from the UK market could depress prices in the short term."

Funds cut positions four weeks in a row

Investment funds cut net length for a fourth consecutive week, according to a Commitment of Traders reports released by the Intercontinental Exchange March 12. This came after five weeks of losses for EU Allowances.

Investors held 36.4 million EUAs in net long positions as of the week ending March 7, having reduced length by nearly 5.9 million, or 14%.

Furthermore, investment funds reduced gross long positions from 105 million EUAs during the week ending Feb. 14 -- the largest net length held in over three years -- to 81 million EUAs as of last week. This means funds cut 24 million EUAs, or 23% over four weeks.

A UK-based carbon broker said the rally to more than Eur80/mtCO2e in January was largely driven by technicals and speculative trading. "When you take a step back, the fundamentals haven't changed -- [EUAs are] pretty bearish."