Do surging carbon prices point to escalating production costs?

Having spent a long period in the doldrums, carbon prices have surged since the start of 2018 , reaching €21.2/t on 30 August, or 2.7x the €7.8/t fetched on 1 January in the European market (European Union Emissions Trading Scheme, or System - ETS). Before that, prices had camped below €10/t since end- 2011. Does this herald an appreciation in energy prices, hence in production costs, in turn affecting energy production? We doubt it , as this appreciation appears to be fuelled by what appear first and foremost to be technical and timely factors, this against the backdrop of persistently thin trading volumes that have exacerbated the price movements observed. However, while carbon allowance prices under the ETS are not currently a reliable signal of where end production costs are heading, notwithstanding their very real incidence on the price of the MWh to which they are closely correlated, they may become just that over the course of the next decade. Bear in mind that the next trading period for the EU ETS (phase IV) kicks off in 2021. It would therefore seem premature to be alarmed or joyful at recent variations in the price of carbon allowances under the ETS. On the other hand, they do provide a first insight into what could happen after Phase IV kicks in , which is of some significance. Under certain circumstances, notably in the event of a recession taking hold suddenly and not gradually, this situation could even have cumulative negative effects on the production of players in the industries concerned. Be that as it may, one point a ppears to have been established: whilst the observation phase, during which carbon allowances have been just about free for most industrial firms, is not yet close to an end, ETS’ lethargy is now over and volatility is back for good .