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Carbon Hits Record 50 Euros on Tighter Pollution Rules
By Will Mathis
May 4, 2021, 12:42 AM PDT Updated on May 4, 2021, 3:57 AM PDT

The rally is changing the economics of pollution by factories
Options market is signaling that prices will rise further
The cost of pollution in Europe has surged more than 50% this year, signaling that the region’s tougher climate policies are starting to make a difference.

Futures in the region’s carbon market, the world’s biggest, exceeded 50 euros ($60) per metric ton for the first time on Tuesday. Rising prices make it more expensive to release carbon dioxide into the air and force industry to look for cleaner ways to stoke their furnaces and keep the lights on.

And the rally has further to go, according to Ulf Ek, chief investment officer at London hedge fund Northlander Commodity Advisors LLP. He expects futures to trade as high as 75 euros by the end of the year.

“The 50 euro-mark has some significance since it has been a target price for some investors for a number of years by now,” Ek said by email. “Fundamentally, we believe prices can go higher than that, but also expect some tough political discussions on our way to 100+ prices which may turn sentiment at some point.”

Carbon Surge
The EU carbon price broke above 50 euros for the first time
Source: ICE
The permits rose as much as 1.3% on Tuesday to trade as high as 50.05 euros on ICE Futures Europe, before trading little changed from Monday.

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Options traders are anticipating even higher prices. Calls to buy European Union emission permits at 60 euros per ton, or about 20% above the prevailing market rate, now have the highest open interest on the ICE Futures Europe exchange.

Last spring, carbon futures slumped with the rest of the global economy as the pandemic struck, trading below 15 euros in late March 2020 as the lockdowns crimped industrial activity.

But as leaders in Brussels moved to make the economic recovery a green one, it became clear that any disruption in the carbon market would be temporary. In July, futures surged above 30 euros for the first time in more than a decade, just days before the EU passed its 500 billion-euro Green Deal.

Arbitrage Opportunity
At the same time, financial players have continued to buy the permits, seeing an arbitrage opportunity between the current price and higher levels needed to achieve the climate plans.

The rally in prices and concerns by the industry over its competitiveness are poised to add further tensions to the political discussions about implementing the Green Deal, aimed at reaching climate neutrality by 2050 and toughening the 2030 emissions-reduction goal.

Some technologies to cut emissions, like hydrogen made without emissions, are still too expensive for steel and chemicals producers to use today. But further price gains could change that.

Carbon Calling
Emission futures call option open interest shows focus now on 60 euros/ton

Source: ICE Futures Europe; December 2021 expiry
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“If industry can’t decarbonize, it could just mean higher compliance bills for a while” said Emily Jackson, analyst at BloombergNEF. “They will likely start being more strategic about their purchasing and could start hedging in the way that the power sector do now.”

But the multibillion-euro price tag that the EU plans to pay for its climate goals will also be eased by the soaring carbon price. Governments auction permits and earmark at least 50% of the proceeds for climate initiatives. As the cost soars, it means EU countries are brining in more money from those auctions.

Record Carbon Price in Europe Will Bolster Government Budgets
EU leaders are due to debate enacting the stricter pollution target for the next decade at an extraordinary summit in Brussels on May 23. National governments are divided over issues ranging from the pace at which the EU ETS should be tightened in the coming years to applying carbon trading to new sectors, such as housing and road transport.

The European Commission is set to propose on July 14 a package of regulations to enact the new 2030 target of cutting greenhouse gases by at least 55% from 1990 levels. The rules will need consent from national governments and the European Parliament to become binding.

— With assistance by Ewa Krukowska, and Andrew Reierson
(Updates with options in 6th paragraph.)
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