Record week for the European carbon market

Posted on Apr 24, 2021 8:19 AM

During a week full of announcements on the fight against global warming, carbon prices chained records. The price per tonne on the European market for CO2 emission allowances exceeded 47 euros for the first time in its history on Thursday, an increase of more than 40% since the start of the year. He had already passed the symbolic bar of 45 euros on Wednesday, shortly after the confirmation of the European Union’s new climate objectives aimed at reducing greenhouse gas emissions by 55% by 2030.

Indeed, this market for “rights to pollute” is one of the main tools of European policy to reduce emissions. This is where manufacturers (electricity production, iron and steel, cement or even part of the chemical industry) and air transport companies must buy CO2 allowances at auction to offset their own emissions. However, part of these quotas is allocated free of charge to avoid relocations in certain sectors particularly subject to foreign competition, such as the steel industry.

Towards a reduction in the number of available allowances

In order to encourage companies to pollute less, Brussels regularly reduces the ceiling of available quotas. However, the new 55% emission reduction target will accelerate this reduction in quotas. At the same time, new sectors such as construction and transport will soon enter the market. This was confirmed by the President of the European Commission, Ursula von der Leyen at the climate summit on Thursday. Coupled with a cold winter, rising energy prices and restarting the global economy, the anticipation of all these changes can only fuel the rise.

The acceleration of recent weeks could also be linked to a last minute rush. Each year, companies must present the results of their emissions for the past year and then justify the allowances they have purchased to offset them. The deadline for the presentation of these quotas being set for April 30, companies which have not anticipated it must imperatively complete their purchases as a matter of urgency.

Strong speculation

All the more so as, this year, they cannot use the 2021 quotas to justify their 2020 emissions. While some manufacturers have become accustomed to waiting to receive their free quotas for the current year to justify a part of their emissions from the previous year, they have no choice this year but to buy the missing allowances. As prices have soared very quickly, some manufacturers are also tempted to buy more to protect themselves from an even greater increase in the years to come.

Manufacturers are not the only ones to anticipate a rise in prices. Some analysts have already forecast prices exceeding 100 euros per tonne in 2030, and the financial industry sees it as both a very green investment – since it encourages companies to pollute less – and very lucrative. The hedge fund Northlander Commodity Advisors has just launched a new fund betting exclusively on increasing carbon quotas. He is looking to raise $ 100 million this year, and has a target of $ 500 million within two years. Another sign of speculative appetite, the Krane Funds Advisors Global Carbon ETF, the largest index fund listed in the United States on the carbon markets, jumped nearly $ 10 million in a single day on Tuesday. It now weighs $ 142 million, down from just over $ 3 million seven months ago.

This financial speculation is not completely negative, because it provides some liquidity to the market. Analysts have also noted that hedge funds have significantly increased their long-term positions. But it tends to make the market extremely volatile. And these sudden price increases are cringe in some countries that still rely heavily on fossil fuels, which emit a lot of carbon. Poland has already asked the European authorities to act to better regulate the practices of investors. Other countries might be tempted to follow suit.

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