AS FINANCIAL MARKETS become cheerier about the pace of vaccinations and the chances of a speedy economic recovery, the prices of stocks, commodities and all manner of assets are rising. So too are carbon prices in Europe, home to the world’s largest emissions-trading system. Prices have surged by 60% since November; on February 12th they hit a record high of nearly €40 per tonne of carbon-dioxide equivalent .
The ETS is an odd market. The commission auctions allowances nearly every day; it caps the overall supply of permits based on the EU’s politically determined emissions targets. Demand, meanwhile, comes from three types of participant. The biggest source of demand is the power and heating utilities, such as Germany’s RWE and France’s Engie. They buy allowances to cover the emissions from current projects or to hedge against future price increases.
The expectation of higher carbon prices may have prompted industrial firms to start hedging their emissions early this year. That added to demand for allowances—as did unusually cold weather, which boosted the demand for heating. Speculators may have accelerated the price rise, by buoying futures prices. Around 230 investment funds hold futures linked to the EU’s allowances, up from 140 at the end of 2019. They account for only about 5% of the futures market, but it is a growing, bullish share.
The presence of financial firms has changed how the market works. Federico Di Credico of ACT Financial Solutions, which specialises in environmental markets, says that the dynamics used to revolve mostly around the commission’s meetings. Now macroeconomic indicators, such as new GDP figures, play a bigger role. Some analysts argue that speculators’ bets cause volatility; others say the consequence has been greater liquidity. Most, though, expect financial flows to grow.
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