Europe’s Carbon Price Has Almost Tripled in 2021 

(Bloomberg) -- European carbon futures rose above 80 euros ($90.272) a ton on Friday for the first time, testing the resolve of politicians who are promising to act aggressively on climate change while grappling with inflation that’s tearing into economies across the globe.

The cost of polluting has increased more than 140% this year after a stricter environmental agenda in Europe was laid out and a sweeping rally in natural gas prices made dirtier coal more economic to use for power generation. The futures price rose as much as 0.7% Friday to 80.42 euros a metric ton on ICE Endex in Amsterdam, before turning negative. 

The fast-paced increase in carbon prices has taken policy makers by surprise. Making it expensive to pollute is meant to push dirty fuels out of the power generation and industrial processes. Right now, that’s not really happening. Soaring natural gas prices mean Europe will likely see emissions increase this year as coal plants burn profitably through the winter. That’s uncomfortable for many leaders that made loud pledges at the climate talks in Glasgow last month.

In the long-term, a high carbon price could accelerate investment in methods to cut emissions or switch to cleaner fuels. Technologies like carbon capture and storage or hydrogen production from renewable energy become more economically viable if the carbon price remains at or above current levels. 

While the high price could spur companies to invest in equipment to lower their emissions, the speed of the increase will likely make them pause to see whether the current prices are here to stay, according to Marcus Ferdinand, a manager focusing on power and emissions in Europe at Oslo-based Thema Consulting Group. The relative strength index, a technical indicator of a market’s momentum, showed the carbon price is the most overbought since May, just before the price dropped 12% in two days. 

“It’s really crazy,” Ferdinand said. “It’s just going up too fast to be sustainable.”

With inflation already surging, rising emission costs aren’t going to help. Rapidly rising carbon prices are stoking concerns that the European Commission could step in to limit speculation in the market. 

As the year comes to a close, a handful of other technical factors are also pushing permits higher. A large amount of options for carbon at 80 euros by the end of the year are set to expire on Dec. 15. That’s likely driving investors who sold the out-of-the-money options to manage their risk by buying futures. The final auction of the year is also set for Dec. 20, kicking off a period when the market will have no new supply until governments start selling permits again in January. 

Carbon’s rally is likely far from over, according to Per Lekander, managing partner at Clean Energy Transition LLP. He expects the permits will surge past 100 euros in the next few weeks as utilities continue to buy allowances to account for their emissions from burning coal this year.

Record pollution costs are also likely to be raised by some heads of government at an EU summit scheduled for Dec. 16-17. Poland’s climate minister Anna Moskwa said in an interview that the carbon market needs broad reforms and that the current prices will only add costs without spurring emissions cuts. 

EU leaders are likely to discuss the carbon price during their talks on rising energy costs at a summit later this month. Ministers clashed over how to reform the electricity market at a meeting Thursday, with Commissioner Kadri Simson attributing carbon’s price rise to demand for emissions allowances and policy messages coming from the recent climate summit in Glasgow.

(Updates price, adds comment in fifth paragraph, adds Poland minister and EU summit in final paragraphs)

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