The price of carbon permits in Europe has crashed dramatically following Russian’s invasion of Ukraine, lowering the cost of emitting carbon for the EU’s most polluting companies.
Permit prices, which are part of the EU’s emissions trading scheme, were launched in 2005, and reached a high of €97 (£80) in early February, but have now slumped below €70. Prices were on course to drop to almost €60 on Wednesday afternoon, representing the biggest fall since 2014.
The carbon price is the EU’s flagship financial mechanism for curbing emissions, with companies, such as airlines, forced to buy the permits when they pollute.
But investors appear to be pulling out of the market, with some experts saying they have been “spooked” by Russia’s invasion of Ukraine. The carbon price usually moves with energy prices but it has decoupled because of Vladimir Putin’s war.
Ingvild Sorhus, a lead analyst for EU Carbon Analysis, said: “The escalating Ukraine crisis continued to spook investors’ sentiment and led to widespread liquidation of EUA positions.
“Carbon prices are currently decoupling from the rest of energy complex, which rose on Russian supply concerns. Some participants perhaps suffered huge losses due to the spike in energy prices and were forced to sell EUA to avoid margin calls.
“They are perhaps fretted [sic] about the impact of sanctions against Russia and also the economic fallout on the EU. Hence international investors maybe choose to offload their exposure to European assets.”
She added that sharply rising commodities prices “could have hurt some industrial producers’ cashflows who then also sold off their surplus EUAs”, with the steep fall triggering more stop-losses and automatic selling.
After the Cop26 climate summit last year, the EU carbon price surged to record levels and continued to do so in January as inflation and energy prices rose.
The carbon price is an important EU policy aimed at curbing emissions across Europe’s entire energy and industrial sector. In theory, the more companies pay, the more effort they will put into cutting emissions.
Meanwhile, Alessandro Vitelli, a freelance journalist specialising in climate and energy, said traders might have sold their permits to raise funds for natural gas positions. He also speculated Russian investors could be pulling their money out to avoid sanctions.
“There has been a general liquidation of positions by investors over the last couple of trading sessions,” he said.
“Some of this is due to commodity funds looking to release cash to move into other assets, but there is also some speculation that Russian investors are pulling their money out of funds to avoid sanctions that would freeze assets.
“The sharp rise in European natural gas prices – 38% today, after a 23% rise yesterday – also means that traders will need to post additional collateral to maintain futures positions.
“They may well have sold carbon permits in order to raise cash to support those natural gas positions.”
Other countries and trading blocs have carbon markets but set their own rules. For example, China has the largest but has lower prices and more relaxed rules.
