European carbon prices have reached a historic milestone, surpassing €38 per tonne for the first time as traders scramble to secure EU emissions allowances. This week alone, prices have surged nearly 13%, marking the sharpest rally since late August. The upward trend was fuelled by an auction in Poland, where companies paid a premium above market levels. Intraday carbon prices hit a record high of €38.08 per tonne on Thursday before slightly dipping below €37.
The surge in carbon prices reflects the increasing cost of releasing one tonne of CO2 and comes as the EU strengthens its commitments to reducing emissions. Since early November, carbon prices have climbed approximately 60%, with analysts noting the dominance of bullish sentiment in the market. The rally intensified as traders who had bet against the price were forced to cover their positions by buying back allowances.
A growing number of traders, including hedge funds, banks, and utilities, expect prices to continue rising as the EU tightens emissions regulations. This shift will enhance the competitiveness of renewable energy alternatives against fossil fuels over time. However, some caution that the carbon market may become a one-way bet, and there are forecasts that the price of EU Emissions Trading System could reach €50 per tonne or even higher in the coming years.
Potential setbacks could arise if Brussels intervenes to cut costs for businesses and increases the availability of allowances in the market. EU ETS prices have experienced volatility in the past, with a 25% price drop between September and November. Analysts also note that the recent rapid gains may prompt some industrial buyers to temporarily step back from the market, hoping for a price retreat. It is worth mentioning that the market suffered a prolonged slump after the financial crisis due to reduced emissions from the global economic slowdown, leading to an excess of allowances and depressed prices.
The potential for price gains in the EU carbon market has attracted the attention of traders outside the industry, including well-known oil hedge fund manager Pierre Andurand, who reportedly entered the market last year. An analyst from his fund recently suggested that the price of the EU ETS could surge to €100 per tonne this year.
