Betting on Pollution Proving to Be One of 2021’s Smartest Plays

Bookmark

Carbon emission futures cleared yet another milestone in Europe, climbing above 40 euros ($49) a metric ton for the first time and making it one of the year’s best performing commodities.

The gain of more than 20% this year took some by surprise and seems to be bolstered by financial speculators betting on increased demand for the pollution rights as the European Union tightens its climate goals.

“We expect the price to be above 30 euros and to head upwards as the market gets tighter in coming years, but to hit 40 now I guess just shows that people are pumped,” said Emily Jackson, a carbon analyst at BloombergNEF. “The market isn’t responding to fundamentals at the moment.”

Betting on Pollution Proving to Be One of 2021’s Smartest Plays

Unlike other commodities, the carbon market is purely artificial, launched by the EU to impose a price on emitting greenhouse gases. More than 11,000 energy-using facilities are covered by the market, which requires them to surrender the permits to account for the quantity of their emissions. As the EU ramps up its climate goals, the cap-and-trade system is central to driving the switch to lesser-polluting technologies.

Benchmark futures climbed to as high as 40.12 euros ($48.67) per ton before slipping to 39.87 euros a ton at 10:50 a.m. in London on Thursday.

Analysts had expected carbon to gain this year, but few saw such a quick trajectory to 40 euros. But last week Bloomberg News reported that a number of hedge funds are betting carbon will rise much faster, to as high as 100 euros this year or next. That helped set off a 16% gain last week.

The speculative buying has added to already tight market conditions to start the year. Auctions began weeks later than normal in January, leaving a long period without any additional supply in the market.

In December, carbon futures broke through 31 euros beating a record held since 2006. It has taken just two months to surge to the 40-euro level, a performance that has far exceeded the gains in benchmark European power and gas prices.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.