EU carbon permit prices crash after Russian invasion

of Ukraine
theguardian.com/environment/2022/mar/02/eu-carbon-permit-prices-crash-after-russian-invasion-of-ukraine

Tom Ambrose March 2, 2022

Neurath Power Station, North Rhine-Westphalia, Germany. The carbon price is the
European Union’s (EU) flagship financial mechanism for curbing emissions. Photograph:
Radius Images/Alamy
Neurath Power Station, North Rhine-Westphalia, Germany. The carbon price is the
European Union’s (EU) flagship financial mechanism for curbing emissions. Photograph:
Radius Images/Alamy

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.

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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.

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