Carbon markets across continents surge

Allowances in the Western Climate Initiative and EU emissions trading scheme (ETS) both hit record highs yesterday, driven in part by increased speculator interest in two of the world's largest carbon markets.

Supply and demand fundamentals partly drove growth in the markets, but both now seem firmly planted in the financial mainstream, with investment firms contributing to high volume of trade, and driving sharp gains in each market.

Prompt-month and December 2021 California Carbon Allowances (CCAs) hit record highs of $25.20/t and $25.54/t yesterday, marking roughly 12pc price jumps for each over the last week.

CCAs spiked last week following the 25 August release of the results of the latest WCI auction, which sold out with record-high clearing prices.

California and Quebec sold all the 71.3mn current vintage allowances offered at the 18 August auction for $23.30/metric tonne, nearly $5/metric tonne above the auction reserve price. The high clearing price took market participants by surprise and immediately triggered a rally in the secondary market in a flurry of trade, marking one of the most liquid trading days of the year.

Parties obligated to comply with California and Quebec cap-and-trade programs made up about two-thirds of the buyers at the current vintage auction, down from 80pc at the previous auction in May, another sign of speculators' increased involvement in the market.

Open interest in auction futures rose slightly ahead of the auction, according to US Commodity Futures Trading Commission (CFTC) data.

A recent increase in the Consumer Price Index has also led to more bullishness in the market, as California and Quebec raise the auction price each year by 5pc plus the rate of inflation.

The Labor Department last put the 12-month inflation rate at 5.4pc, which would translate into an auction reserve price of $19.55/t next year, up from $17.71/t this year.

While the gains over the last week are the sharpest in over a year, the CCA market has had a bullish run in recent months, with prices beginning to rise at the end of April as the US pledged to cut its greenhouse gas emissions to half of 2005 levels by the end of the decade. That new commitment forms the basis of the US' new nationally determined contribution, or emissions pledge, under the Paris climate agreement, which it submitted to the UN.

In Europe, carbon prices have also gained in part from increased speculator interest. They have also taken firm support from recent gains in European gas markets, which strengthened gas-to-coal fuel switching potential in the region's power sector and in turn increased compliance demand for allowances to cover the resulting, more carbon-intensive generation.

The benchmark front-year EUA product hit a record-high trade of €61.01/t CO2e on 30 August, roughly 85pc above the level at which the contract was trading at the beginning of this year.

The rally has been compounded this week by there being two fewer scheduled primary market auctions than in a normal week, which is limiting fresh allowance supply entering the carbon market. Just 5.6mn permits are on offer in sales this week, the lowest of any week this year excluding those with no auctions whatsoever.

By Jessica Dell and Victoria Hatherick