Hedge Fund Boss Says EU Carbon Has Much Further to Fall

(Bloomberg) -- A veteran hedge fund investor sees a further slump in European Union carbon permits on the horizon as energy supplies soar and demand remains subdued.

A flood of renewable power, combined with falling gas prices and a recovery in nuclear and hydro plants will keep the pressure on carbon, said Per Lekander, chief executive officer of London-based Clean Energy Transition LLP. Prices have already slumped 30% this year as that combination curbs pollution that’s the basis for demand to buy emissions permits in Europe. 

European industrial companies must purchase carbon permits to account for each ton of emissions they release into the atmosphere. The price soared in recent years as the EU moved to use the market to help deliver on plans to reach climate neutrality by the middle of the century. But the trajectory has been upended by the bloc’s energy crisis, which accelerated solar-plant development and destroyed demand from energy-intensive industries. 

Given those dynamics, along with increased supply of permits at auctions, Lekander said carbon should be worth as little as €35 ($37.72), less than two-thirds the current benchmark futures contract.

“It’s going way lower,” Lekander said in a phone interview. “The fundamental demand of carbon in the near term is going to be extremely weak.” 

Benchmark carbon futures for December fell as much as 1.8% Wednesday to €55.41 a ton, the lowest since March 2022. 

The falling price this year is also partially due to supply. 

The EU decided in 2022 to sell €20 billion worth of permits to fund its RePowerEU program, a strategy to cut the bloc’s reliance on Russian gas imports. Under that program, countries will front-load auctions that would have been sold later in the decade to fund the shift away from gas now. The market will get much tighter in the coming years. 

“If long term it’s tightening, but in the short term it’s adding more supply in a market where emissions are dropping and demand is dropping, it’s not good for keeping the price up,” said Ingvild Sørhus, who focuses on carbon at Oslo-based analysis firm Veyt. “The policy is creating huge uncertainty for the market.”

It’s not clear how many permits the EU will sell, given that the bloc will have to sell more to meet its target when the price falls, Sørhus said. There’s also little information about when those sales volumes will be adjusted for price swings. 

(Updates price in sixth paragraph)

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