Today EUA prices broke their all-time record, moving bullishly since November, reaching close to €100 per tonne. What is driving prices upward?
In December we saw a steep increase in EUA prices because of higher demand for coal to replace gas in fulfilling heating requirements. But now, even though power and gas prices have largely returned to their pre-December levels, we still see increases in traded volumes and prices of allowances. From December onwards we have witnessed significant policy developments, such as the unveiling of the classification of nuclear and natural gas as sustainable under the EU taxonomy, and expectations of possible revisions to the EU ETS directive and Carbon Border Adjustment Mechanism directive to be released in the coming weeks.
Looking at market fundamentals, the supply of allowances is of course fixed for the year. So, are the increased carbon prices and trading volumes driven by demand fundamentals and justified risk premiums, or by sentiment and speculation surrounding predicted future policy decisions?