Carbon Hits New Records After Watchdog Finds No Market Abuse
Carbon Hits New Records After Watchdog Finds No Market Abuse
(Bloomberg) -- The cost of pollution in the European Union rose to new highs after a report by the bloc’s market watchdog dismissed concerns by some governments over abuse and the role of speculative investors in emissions trading.
Benchmark carbon permits rose as much as 1% percent to a record 69.77 euros a ton on ICE Endex on Friday, extending this week’s gains to 10%. The cost of polluting for manufacturers and utilities has more than tripled over the past three years.
The recent surge has been mostly caused by economic and political factors, the European Securities and Markets Authority said in a preliminary assessment published late on Thursday. It was requested by the European Commission after some member states, including Poland and the Czech Republic, voiced concerns about rising volatility and speculation in the EU Emissions Trading System.
“Especially since 2018, EU allowances experienced a price increase which was originally driven by its market reform but turned into a surge following the Covid market turmoil in March 2020, mostly driven by economic fundamentals and political decisions,” ESMA said. The report is due to be discussed by EU heads of government next month.
The 27-nation bloc is currently debating the deepest overhaul of its cap-and-trade program to date as part of measures to implement a stricter emissions-reduction target for 2030. The EU, whose overarching aim is to reach net-zero greenhouse gases by the middle of the century, wants to be the leader in the global fight against climate change.
Carbon has notched fresh highs in the last few days, following relatively calm trading in recent weeks despite gas and power markets remaining volatile.
Expensive gas and scarce global supplies of the fuel mean coal plants are more profitable in Europe. That’s driving demand for carbon permits to account for the higher emissions. European coal for next year rose as much as 1.8% to $114 a metric ton on ICE on Friday.
Prices also have been supported this week by decisions taken on Saturday at the COP26 global climate talks that included a deal on rules for international emissions markets and an agreement to keep pressure on countries to reduce pollution.
“COP26 and all the discussions have cemented people’s conviction that high carbon prices are here to stay,“ said Ulf Ek, chief investment officer at Northlander Commodity Advisors. “On top of that we have the European energy crisis, which means we’re going to burn more coal this winter and burn as much gas as we’re able to. More pollution means higher carbon prices.“
The prospects for more scarcity in pollution permits and further increases in the cost of emissions under Europe’s ambitious climate strategy have boosted demand from emitters in the program and have made the market more attractive for financial investors. As the pace of price gains accelerated, countries including coal-dependent Poland began to raise concerns over a market bubble.
The government in Warsaw last month called on the European Commission to introduce a set of measures to curb speculation, which it said was putting energy companies at risk, hindering the clean transition and becoming a burden for the most vulnerable citizens.
Holders Breakdown
The preliminary report by ESMA showed that as the market expanded, the number of companies holding futures has tended to increase since 2018 in all categories.
“The increase in the number of market participants by itself cannot be taken as proof for any patterns of disorderly trading or abusive behavior present in the carbon market,” the watchdog said.
Between 40% and 47% of open positions are in the hands of investment firms, with non-financial companies holding 45% to 50%, according to ESMA. Investment funds and other financial counterparties account for about 8%, according to the report. The breakdown does not appear to have significantly changed since 2018.
ESMA will further analyze the carbon market in a next report that is due in early 2022.
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