Carbon speculators are re-entering the market, signalling a bullish trend in a market that has already surged by about 60% since hitting a low point during Europe’s coronavirus lockdowns in mid-March.
As economies gradually reopen, the demand for carbon permits is primarily driven by financial players rather than utilities or industrial companies, which still have relatively subdued demand for permits.
This shift suggests that financial investors are starting to return to the market, according to Bo Qin, a carbon analyst at BloombergNEF. It is anticipated that demand from speculators will continue to rise in the second half of 2020. This price increase occurred during a period of unusually low power demand.
Most of the permits in the EU carbon market are used by utilities, which purchase them when they need to burn more fossil fuels to generate power. The recent market movement indicates that investors are beginning to factor in the role of Europe’s carbon trading system in the EU’s climate-neutrality goal, which is a crucial component of the bloc’s €750 billion ($824 billion) economic recovery plan.
As governments worldwide intensify their efforts to combat global warming, oil major BP Plc has significantly raised its projected cost of carbon emissions. The company now includes a scenario with a price of $100 per ton by 2030, quadrupling the current price of permits in Europe.
This situation harks back to 2018 when emissions prices soared as financial investors anticipated supply cuts from the EU. Today, investors can expect similar bullish measures as part of the region’s aggressive approach to reducing greenhouse gas emissions.
“It means people are taking the EU system seriously,” stated Louis Redshaw, CEO of Redshaw Advisors. “They believe that the system will become more stringent, and they anticipate higher prices.”
However, not everyone is convinced that speculators have fully returned. Nicolas Girod, Managing Director at ClearBlue Markets, suggests that utilities may be purchasing permits at low prices for future use. Nevertheless, if speculators do return, it could drive prices back up to €30 per ton by the end of this year.
