Increased Volatility Expected in European Carbon Market

The world’s largest carbon market is expected to experience a resurgence of volatility as European lawmakers resume talks on establishing a reserve to reduce the surplus of carbon permits. Citigroup, Societe Generale, and Commerzbank predict that prices will start fluctuating again. Increased volatility can offer opportunities for traders to profit from short-term buying and selling.

The resumption of talks on the reserve is expected to drive the market up and down as comments from lawmakers influence market trends. The price of carbon futures has already climbed 64 per cent from a nine-month low at the end of March to 6.10 euros per metric ton.

Volatility in the European carbon market has historically followed political statements and regulatory changes. The European Union’s cap-and-trade program, which auctions or distributes permits to factories and utilities, has experienced price swings due to market effects and political factors.

The proposal for a market reserve, which would start in 2021, aims to address the surplus of permits. The reserve would remove or return allowances based on the surplus levels. Talks on the reserve have resumed after a two-month pause, and further discussions and input from member states are expected.

The lengthier timetable for the reserve discussions compared to previous negotiations on backloading permits may lead to relatively muted volatility. The outcome of the reserve talks and the broader climate and energy goals for the next decade will shape the future of the European carbon market.