Insight Focus
EUA prices rose above EUR 75.00 for the first time in four months. Rising energy prices driven by Israel’s attack on Iran, heatwave forecasts, and nuclear safety concerns supported the rally. UK allowances extended gains on progress toward EU market linkage and continued investor interest.
Geopolitics, Energy Market Drives EUA Rally
European carbon allowance prices breached the EUR 75 barrier for the first time in four months last week, boosted by a combination of energy and macroeconomic reactions after Israel launched attacks on Iranian military and nuclear assets.
The benchmark December 2025 EUA futures contract jumped to a high of EUR 76.75 on Friday — its highest since February 18, as crude oil, natural gas and German power prices all surged in the wake of Israel’s offensive.
Source: ICE
Oil and liquefied natural gas prices in particular reacted to the possibility that Iranian retaliation may take the form of a closure of the Straits of Hormuz, a key shipping lane for much of the world’s oil and gas supplies.
At the same time, German power and European natural gas markets were already rising after France’s nuclear safety agency had reported potential defects at one of the country’s 18 atomic power plants.
Traders noted that the same reactor, the Civaux 2 unit in central France, had been one of a number of plants that had been forced to shut three years ago after cracks had been found in pipework. German power rose by as much as 5% over the week, while front-month TTF gas rose to its highest in more than two months as traders also factored in forecasts for very high temperatures across Europe, boosting the call on electricity for cooling.
Source: Investing.com
This combination of bullish factors helped all energy markets to post robust gains on Friday, before some traders started to take profit from the within-week gains as the weekend approached.
Prior to the late week rise, EUA prices had been stuck in a EUR 70-75 range for a month, as gloomy macroeconomic indicators and declining fossil fuel power generation had capped the market’s upside.
UK Carbon Prices Surge on Market Linking Momentum
The recovery in EUA prices has also underpinned continued strength in UK carbon allowances, which are still enjoying sustained strength after the EU and UK agreed to begin negotiations over linking the two markets.
December 2025 UKA futures climbed above GBP 50/tonne in mid-May and reached a 22-month high of GBP 55.50/tonne in the wake of last month’s UK-EU summit.
Source: ICE
The strength in UKAs is driven by a continued large holding by investment funds, who account for more than 18% of the total open interest in UK allowances. This compares to a funds’ share of just 6.8% in EUA open interest.
Funds are betting that a linking agreement will bring UKA prices up to the same level as EUAs, since UK and EU allowances will be eligible for use in both markets. A similar arrangement already exists between the EU and Switzerland, whose carbon markets are already linked.
UKAs currently trade at around 84% of EUA prices, and the spread between the two markets has narrowed from as much as EUR 42/tonne at the start of this year to just EUR 7.80/tonne in late May.
Some trading sources have expressed scepticism that speculative investors will be willing to hold onto these long positions – totalling more than 20 million UKAs – over the next two to three years as linking negotiations progress, particularly when the most recent set of verified UK ETS emissions data showed that supply of UKAs outstripped demand by 14.3 million tonnes in 2024.
Coal Closures, Industrial Struggles Drive UKA Oversupply
This surplus in UKA supply has grown steadily year-on-year and the total net oversupply since 2021 is nearing 50 million tonnes, even though annual supply of allowances through allocation and auction has been declining steadily. Total UKA supply will drop to 82 million UKAs in 2025 compared with 121 million in 2021.
Much of the surplus last year was generated by the closure of the last coal-fired power station in the UK – at Ratcliffe-on-Soar – in September 2024, as well as the closure of the Port Talbot steelworks at the same time. The two accounted for combined UKA demand of 9.4 million tonnes in 2023.
The closure of the Ratcliffe coal plant means that the “easiest” decarbonisation – the switch from coal to gas in power generation – is now complete in the UK, and the focus now moves on to industrial plants, where finding low- or zero-carbon alternatives is considerably more difficult.
Coal pile in front of Ratcliffe on Soar Power Station in Nottingham, England
The EU has encountered the same problem. Data for the period from 2013 to 2020 shows that power generation emissions covered by the EU ETS fell 37.7%, while industrial emissions declined by just 92%.
While promising technologies such as “green” hydrogen – made by electrolysis using renewable electricity – are hailed as long-term replacements in many applications, they are still in their relative infancy and have not yet achieved the at-scale costs required to be a viable prospect.
And with the approach of CBAM meaning that industrial operators will start to lose their free allocations of EUAs and UKAs, the carbon market is going to represent an ever-increasing force for decarbonisation in the next few years.
