While rising commodity prices have attracted the glare of public attention, carbon has remained in the shadows. The price of European carbon allowances (known as European unit allowances, or EUAs) has risen only modestly this year, to about €27 ($43, £21) a tonne. But market pressures are building that could take the price to €100 a tonne or higher.
EUAs permit companies to emit a specified amount of carbon. These allowances are traded: companies have fixed emissions limits imposed on them by the European Commission but can offset their excesses by buying allowances in the market. However, the levels of demand and supply are severely out of balance. This may lead to a radical repricing of carbon that will fundamentally change the political, business and financial landscape forever.
The astonishing truth about the carbon market is that nearly everyone is short carbon: companies will breach their emissions limits and do not own allowances to make up the difference. When I ask market participants: “who has surplus allowances to sell?” I get back blank stares. It cannot be long before the market recognises this fundamental supply/demand imbalance.
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