Speculators test EU policymakers' nerve as carbon prices climb to €55/mt

London, (Quantum Commodity Intelligence) – EU carbon prices hit a fresh all-time high of €55/mt this week as traders and speculators look to lawmakers to turn ambitious goals to cut emissions into deeper cuts of allowances in the cap-and-trade scheme.

Prices of carbon in the EU Emissions Trading Scheme - the EU's flagship policy tool to cut emissions - remain up almost 60% on the year so far, with the bloc promising to cut emissions 55% under 1990 levels by the end of the decade versus a business-as-usual scenario of about 45%.

While this is higher than previous goals and was well-anticipated, the expectation now among traders and speculators is that reforms to the carbon market could lead to a removal of surplus permits and a proposal to force heavy industry to buy permits and even include buildings and transport within the scheme for the first time.

Talk in the carbon market over recent weeks has pointed to new investors coming into the market and pushing prices higher - follow-through buying after President Biden held a virtual climate summit last month.

Yet while higher prices are likely to be seen as a positive development by European Commission policymakers that have long desired the price to be high enough to impact long-term planning decisions in infrastructure, it has irked some of the bloc's members and will likely test a highly controversial policy tool to keep prices in check.

Last week, the EU's Commission head of climate policy Frans Timmermans warned against intervening in the market and said prices should go higher if the bloc is to meet its goals to cut emissions.

That breathed confidence into the market that there is no immediate plan to keep prices in check.

Analysts are now talking about prices rising further to €75/mt over the next three months, with some stating that in order to make hydrogen production from renewable energy competitive, prices would need to breach €100/mt.

What governs the triggering of a mechanism to intervene in prices is unclear, but the diversity of the energy system across the EU means countries have wildly differing views on the "right carbon price".

In the past, those nations with less carbon intensity have broadly supported higher prices, while those with higher carbon-intensive economies, such as some states in eastern Europe, argued for lower prices.

Initial changes to the scheme to remove surplus permits following the 2007/2008 financial crisis caused controversy, with coal-reliant states such as Poland insisting measures to limit price hikes be incorporated into law too.

And the country's biggest power generator has warned higher carbon prices could undermine the country's plans to decarbonise, saying a price above €40/mt jeopardises its green investment plans.