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Hedge funds and other speculative investors are piling into EU carbon markets ahead of a looming supply squeeze, helping fuel a surge in the price of emissions permits that is raising costs for some of the bloc’s heavy industries.
Investment funds’ net bets on rising prices of European carbon allowances (EUAs) have been climbing sharply since August and this month hit their highest level on record in data going back to 2018, according to figures from Intercontinental Exchange.
While net long positions fell slightly last week after US President Donald Trump’s tariff threats over Greenland sparked a market sell-off, they remain near their record high.
Analysts say the bullish bets reflect a tighter supply of permits in the years ahead given rules set by the European Commission. The total amount of permits distributed to the market is set to fall 15 per cent in 2026, according to estimates by energy consultancy firm ICIS.
Christoph Mueck, manager of the global carbon fund at Altana Wealth, said: “There is a perfect storm of policy changes that will lead to a significant undersupply of carbon allowances this year and next.”
EU businesses in high-polluting sectors such as power, energy-intensive industrial manufacturing and parts of the aviation sector are required to hold permits in order to produce carbon emissions, with one EUA allowing the holder to emit one tonne of CO₂.
The majority are sold in auctions, but some industries also receive a share of allowances for free. To incentivise decarbonisation, the issuance of permits falls each year at a preset rate.
But in addition to this regular annual decline in issuance, the Commission has scheduled an additional reduction this year and will also cancel some extra allowances that had previously been added for the maritime sector.
Brussels had also since 2023 brought forward the sale of some permits to finance €20bn of grants to EU member states in order to reduce the bloc’s dependence on Russian gas. Sales under this scheme are scheduled to end as soon as the EU hits its revenue target, and no later than August 31.
The surge in speculative purchases has helped drive a rally in the price of EUAs, which have jumped from about €70 per permit last summer to €86 on Wednesday, having risen to a more than two-year high of €92 earlier this month.
Although they briefly sold off early last week during the political crisis over Greenland, prices have partially recovered.
Mark Lewis, managing director at climate advisory and investment management firm Climate Finance Partners, said: “The Greenland episode has reminded traders that political and geopolitical risk is a very real factor in this market.”
He said the “coming supply crunch” made permits “a very good investment”.
But he added: “European industry is struggling with high energy costs. If the price of permits rises too much too quickly, it is only a matter of time before businesses start putting pressure on politicians to do something.”
In recent months some European politicians have shown growing signs of discomfort about the costs of the climate agenda, with the EU diluting or delaying several flagship policies.
German Chancellor Friedrich Merz raised the issue of EUA costs in the autumn, arguing for free allowances to continue to be given to European industries beyond the current phaseout date of 2034.
Last week, Slovak Prime Minister Robert Fico wrote on X that he had sent a letter to the Commission, proposing to suspend the EU’s carbon market for four or five years. The Commission is scheduled to publish a review of the scheme later this year.
But others say the sharp rise in permit prices is a benefit of, not a flaw in, the EU’s climate agenda.
“The higher carbon price tells investors to take decarbonisation seriously and allocate capital accordingly,” said Marcus Ferdinand, chief analytics officer at carbon markets intelligence firm Veyt.
“So far, industry has been slow to invest in the green transition,” he added. “But if the EU is serious about its goals, the carbon market will head in a different direction. Industry needs to get used to the new reality.”
Speculators say that by adding liquidity to the market and anticipating tighter supply in the years ahead, they are smoothing the transition to higher carbon prices.
Casey Dwyer, managing partner at commodity investment firm Lattis, said: “Everyone frets about speculators, but they are exactly what the market needs. Meaningful industrial abatement does not kick in until carbon prices get much higher. Speculative buyers help solve this imbalance.”
Dwyer sees carbon permits rising to more than €100 per tonne this year.
Additional reporting by Alice Hancock in Brussels
Climate Capital
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