EU carbon prices crash ahead of December 2021 futures contract expiry

EU carbon allowance prices crashed by more than Eur10/mt CO2e Dec. 17 in extremely volatile trading following the expiry of options contracts during the week and ahead of futures contracts expiring Dec. 20.

EU Allowance futures contracts for December 2021 delivery on the ICE Futures Europe exchange fell as low as Eur73.01/mt Dec. 17 compared with a close of Eur84.77/mt Dec. 16, a drop of 13.9% in a single day.

The dramatic crash below Eur74/mt came after December 2021 EUA options contracts on ICE had their last trading day Dec. 15, with futures set to expire Dec. 20.

"I believe the move today is of a technical nature, mainly due to the expiry of the Dec 2021 options contract Dec. 15," said a continental European utilities analyst Dec. 17.

"Futures [expiry] still to come on Dec. 20. I think that it was always likely that the market would calm down a bit after those two dates. There was a lot of open interest in the Eur80/mt calls (18.7 million mt on Dec. 7) which all of a sudden got into the money and caused some covering," he said.

"With these moves now almost over, it's back to fuel switching cost," the analyst said, with the market looking ahead to 2022 for signals on the power, gas and coal markets.

Trading volume on the Dec. 2022 EUA futures contract was set to take off in the coming days with the Dec. 2021 contract going off the board Dec. 20, prompting traders to roll positions over into the new nearest December position.

Further complicating the end-of-year price dynamic, the last government auction of EUAs is set to take place Dec. 20 and sales will be on hold over the seasonal break before resuming Jan. 10, according to European Energy Exchange data. The planned halt to auctions means no primary supply will enter the market for a three-week period.

The wider power and natural gas markets were also jittery after news Dec. 17 that the operator of the Nord Stream 2 gas pipeline linking Russia and Germany had begun filling a second string of the link with gas.

The initial news appeared to contribute to bearish sentiment in the carbon market, given the link between gas and carbon prices. However, the news did not necessarily imply supply of gas through the pipeline will arrive in Europe any time soon. Germany's federal networks regulator the Bundesnetzagentur said Dec. 16 that there would be no final decision on the certification of the operator of the pipeline in the first half of 2022.

With gas in short supply in Europe this winter and no immediate prospect of additional Russian flows, this could remain a supportive factor for carbon prices in the short-to-medium term.

Meanwhile, in the UK Emissions Trading System, UK Allowance prices rallied to an all-time high of GBP79.20/mt ($104.81/mt) at the close Dec. 16. The gains came after the UK government announced Dec. 14 that it would not intervene to increase or bring forward auction supply to ease the market in December.

UKA prices averaged above the intervention threshold of GBP52.88/mt in September, October and November, triggering a meeting of the UK ETS Authority to discuss action. The decision not to intervene in December does not prejudice action in the future, the government said, suggesting it could take action in the coming months if carbon prices were to cause acute pain for UK-based emissions-intensive industries.