EU, UK carbon prices rise tracking gas, geopolitics, further ETS linkage talks

European carbon allowances rose in the week ending March 21, driven by natural gas, geopolitics and technical factors.

UK carbon prices continued to rise for a second consecutive week, fueled by statements by UK officials that they were considering linking the national emissions trading system in the UK with its European counterpart.

EU Allowances were trading at Eur73.04/mtCO2e ($79.21/mtCO2e) at 1134 GMT March 21, up around 3% 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 Eur72.99/mtCO2e on March 20.

"We are on a bullish trend," a carbon and power trader based in Europe told Platts, adding that they believed prices would continue to go up.

The source further said that natural gas was currently a big factor driving EUA prices. "Gas is at a very critical point because of geopolitics," the trader said.

Markets continued to follow news surrounding a potential ceasefire between Russia and Ukraine over the trading week. Russia's President Vladimir Putin on March 18 ordered a 30-day halt to attacks on Ukraine's energy infrastructure following a telephone conversation with US President Donald Trump. On March 21, natural gas prices rose(opens in a new tab) following a major explosion at the Sudzha metering station on the border between Russia and Ukraine, the previous entry point for Russian flows transiting Ukraine to the rest of Europe.

"Our focus today is on natural gas prices and technical levels," another Europe-based carbon trader said. "Eur73.42/mtCO2e and Eur72.75/mtCO2e are mentioned by technical analysts as support levels," he added. "There is a lot of algorithmic trading in the EUAs market."

While EUAs continued to track natural gas, the correlation with the Dutch TTF waned over the trading week. On March 21, the EUA nearest December 2025 contract was trading 0.04% higher at 1137GMT, while the TTF front-month contract was up 1.9%.

"Correlation between the two was high last year, artificially high for carbon and gas. [This] sticks a bit. This year, the correlation is not as high," Ingvild Sorhus, manager of EU Carbon Analysis at Veyt, told Platts.

"We are expecting that the correlation will be weaker this year [and] that market participants will look to the fundamental picture," she added.

UKAs rise a further 7% on linkage talks

UK carbon prices rallied for a second consecutive week following news that the UK government was considering linking the UK emissions trading system with its European counterpart.

"For UKAs, it's been a lot about statements. UK participants have been hoping there would be a linking agreement," Sorhus said.

UK Allowances were trading at GBP47.35/mtCO2e ($61.27/mtCO2e) at 1103 GMT March 21, up around 7% week over week, according to ICE data. Platts assessed UKAs for December delivery at GBP46.48/mtCO2e on March 20.

This comes as prices are trading at six-week-highs(opens in a new tab) after the UK government said late March 20 that it was "actively considering the case of linking ETSs" ahead of the UK-EU summit on May 19.

Market participants have pointed out that the linkage would likely be a long process, involving harmonizing the two systems. "The UK needs to align the market stability reserve," a European carbon trader said, adding that linking the two ETSs "is going to take a while."

Meanwhile, Sorhus points out that while some points around free allocation and supply adjustment mechanisms differ between the two schemes, the linking process should not be a difficult one.

"Overall, the two systems are quite similar on the broad lines – ambitious system with an ambitious setup. If you judge on that basis, it shouldn't be very painful or difficult to [link the two systems]", she said. "But this is not happening in a vacuum. It will be part of a bigger package."

The spread between the Platts EU and UK respective nearest December carbon prices has been narrowing over the week. It was assessed at Eur17.44/mtCO2e March 20, tighter by 57 euro cent compared to the week before.

Analysts from Commodity Insights held a bearish view on UKA prices moving forward. "We expect that the price will pull back in the second half of March under pressure from market fundamentals," they said in a recent outlook. "The imminent release of preliminary data on carbon emissions in the UK for 2024 will influence market dynamics, as participants will modify their trading strategies for 2025."

Funds increase gross short positions

Investment funds cut net length on EUAs for a fifth consecutive week, according to a Commitment of Traders report released by the Intercontinental Exchange March 19. Market participants told Platts they were not surprised by the position reductions from funds.

"It made sense that they reduced [positions] considering the downward price movement. It didn't come as a big surprise," said Sorhus.

Investment funds held 31.1 million EUAs in net long positions as of the week ending March 14, having reduced net length by 5.3 million, or 15%.

This was largely driven by a rise of 5.8 million EUAs in gross short positions from investors. Long positions, meanwhile, remained largely stable at 81.8 million compared to 81.3 million last week.

"My opinion is that [the COT report] was already priced in," another EU-based carbon trader said. "The problem with the big funds is that you can only know the week before."

In the UK market, positions remained largely stable, with funds holding 12.9 million UKAs in net length, up 0.7% week over week.