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EU carbon prices at 4-month highs

Benchmark carbon prices have hit their highest levels this year, the December 2008 EUA contract touching €18.00 on the European Climate Exchange (ECX) on April 23.

Prices in other contracts in phase two of the EU Emissions Trading Scheme (2008-2012) are following the benchmark contract higher while prices in phase one continue to languish. The December 2007 contract closed at 68 cents on April 23, just off record lows registered the previous week. Daily trading volumes continue to grow, averaging 3.2 million tons a day on the ECX in March compared to just over 3 million in February and 1.8 million six months ago.

Almost 70% of trade is in the benchmark December 2008 contract and less than 20% is in the phase one December 2007 contract. The other exchanges and over-the-counter market show a similar picture. The phase two market has been on the up since mid-February when the December 2008 contract hit a low point of €12.25. Since then, a combination of growing confidence in the carbon market and rising European power prices have seen phase two prices rally almost 50%. The European Commission continues its tough line on phase two national allocation plans (NAPs) to ensure there is a shortage of EUA permits in 2008 and beyond, companies are forced to cut emissions, and a viable carbon market is bedded down.

Hungary the latest member state to have its requested allocation pared back by Brussels – more than 12% in this instance. Over allocation of permits in the first phase meant there were more permits issued than there were emissions. This led to a collapse in demand for the December 2007 contract, and hence the rockbottom prices. So far, total phase two allocations are 9% below phase one and almost 10% below what countries had originally requested for phase two. The EUA market is a major influence on the prices of Kyoto's CER carbon credits and it may be that the prices of issued CERs will rise if current benachmark EUA prices are maintained. (