The benchmark European carbon price plummeted 16.25% on Tuesday, closing at 68.85 euros. The price is now down more than 28% since Russia's invasion of Ukraine, with the price decoupling from the energy markets it normally monitors due to profit-taking and supply concerns.
In most cases, high gas prices often lead to higher carbon costs as power facilities switch to coal, which generates twice as much carbon dioxide as gas plants and hence boosts demand for carbon permits.
Since the war broke out, the Dutch front-month contract TRNLTTFMc1, the European benchmark, has risen 30% to 114.20 euros. However, the price of European carbon permits extended the slump.
“Under current circumstances, the effect is less relevant. As gas and power prices rise, some participants are more likely to sell their EUA positions to cover losses elsewhere,” said Refinitiv, a financial market data provider. Analysts went on to say that this suggests carbon is breaking its December coupling trend with gas.
Analysts agreed that sanctions on Russia, rising energy prices, and the possible economic fallout from the Ukraine conflict all contributed to fears of industrial demand destruction.
Carbon prices had been approaching the historic milestone of 100 euros per tonne before Russia's invasion of Ukraine, having increased approximately 150% last year to a record high of 98.49 euros per tonne in early February.
Engie EnergyScan analysts remarked, “The market's fundamentals, namely its increasing tightness, are unaffected by the crisis, and current pricing might be regarded attractive.”
Speculators, on the other hand, are likely to wait for the crisis to pass before returning to the emissions market, lowering the chances of reaching 100 euros per tonne before the next quarterly options expire in March, said analysts.