Intra-day price volatility in the EU emissions trading system (ETS) allowance market rose to record levels during March and April as the Covid-19 pandemic drove extreme moves in both directions.
The average intra-day range between the EU ETS front-year contract's session low and high reached €1.26/t of CO2 equivalent (CO2e) in March — the widest this has been in any month of the carbon market's continuing third trading phase (2013-20) — and then dipped only narrowly to €1.21/t CO2e in April.
This compares with an average intra-day price range of just €0.69/t CO2e in February and €0.74/t CO2e in January. Before March, no month had recorded an average range wider than €1/t CO2e since May 2019.
The intra-day range recorded reached as wide as €2.75/t CO2e in late March as prices tumbled sharply following the start of social distancing measures across most of Europe, which triggered a significant drop-off in the continent's power demand, industrial activity and air travel.
The EU ETS December 2020 contract's value was pulled down to 20-month lows of below €15/t CO2e, while the €5.89/t CO2e month-on-month loss in March was the largest recorded by a front-year product since July 2008.
The high levels of price volatility drove a significant increase in the volume of allowances traded at the exchanges over March and April. A record 677.7mn December 2020 delivery allowances changed hands at the Intercontinental Exchange during March, and although total volumes dipped to 477.9mn in April, this was still the highest for any month other than March since October 2018. By comparison, the average volume of front-year allowances to trade in a month has been 400.4mn since the start of 2019.
With many of Europe's major economies now beginning the process of easing their Covid-19 lockdown restrictions, EU ETS allowance prices were able to recover value in April and have since stabilised during early-May trading, during which the market's front-year contract price has closed each session within a relatively tight range spanning only around €1/t CO2e. And the average intra-day price range recorded so far in May has been just €0.84/t CO2e.
But still the market's extreme volatility over the March and April period may have long-term implications for the EU ETS, with the UK government now understood to be considering whether a carbon tax would be a preferable and more stable option for the country's future carbon pricing beyond its scheduled exit from the European carbon market at the end of this year.
The UK had previously stated that its preference would be the formation of a national ETS that would be directly linked to the EU's, allowing EU emitters continued access to UK-issued allowance supplies. But the EU ETS would be losing one of its largest net exporting participants if the UK were to opt for an independent carbon pricing mechanism.


