Germany Signals Record EU Carbon Price Rally May Slow Down

(Bloomberg) --

Germany said the record-high prices in Europe’s carbon market reflected investor confidence in the region’s toughened emissions goals and that further gains would likely moderate.

“There is currently no fundamental reason to expect the price hike seen during recent months to continue indefinitely,” the German Environment Ministry said in response to questions by Bloomberg News. The emissions market should already reflect a price level in line with agreed climate targets and growing at a normal balanced pace, it said.

European Union carbon prices more than doubled over the past six months, prompting concerns the rally has been fueled by financial investors rather than demand by companies required to hold the permits. Poland has said record-high prices may derail the EU’s climate goals and called for an investigation into the role of speculators in the market.

Germany said the rising cost of the pollution rights shows investor confidence in the EU’s cap-and-trade emissions program after its last reform. Last month’s deal by EU lawmakers to deepen the region’s target for cutting greenhouse-gas emissions at least 55% by 2030 from 1990 levels gave investors more clarity, the ministry said by email.

Europe’s biggest economy also defended the role of financial investors in the EU’s Emissions Trading System.

“If the price of certificates appears undervalued, for instance in light of previously unexpected climate policy developments, these actors create additional demand and contribute to prices moving swiftly onto a new balanced growth path,” the ministry said.

The EU’s carbon market is the bloc’s flagship climate policy tool, imposing gradually shrinking pollution caps on about 12,000 installations owned by manufacturers and utilities as well as airlines. Participants are required to hold permits to match their CO2 output.

Safety Clause

The ETS has no price floor or ceiling, though there is a mechanism that allows the EU to step in to the market in the case of prices rising to levels that can’t be accounted for by prevailing conditions.

“In case of prices rising to levels that cannot be explained by changed market conditions, the EU ETS directive contains a safety clause, which allows the EU to react and stabilize the market,” the ministry said.

The European Commission, the EU regulator, has repeatedly declined to comment on how exactly it calculates the level that would trigger intervention. Some analysts have said the price would need to rise above 70 euros a ton for the EU to start acting but the lengthy regulatory procedures risk making it ineffective. Carbon futures fell on Thursday after hitting a record 55.47 euros the previous day.

The EU’s climate chief Frans Timmermans said last week the carbon prices must go even higher to meet the bloc’s climate goals and warned the EU should be very careful not to intervene to moderate the cost of emissions.

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