Hedge funds and other speculative investors are increasing exposure to the European carbon market as expectations grow of a tightening supply of emissions permits, pushing prices to multi-year highs, according to a report by the Financial Times citing data from Intercontinental Exchange.
The figures show that investment fund net long positions in European Union Allowances (EUAs) reached a record level this month, the highest since records began in 2018. While positioning eased slightly following broader market volatility linked to geopolitical tensions, bets on rising prices remain close to historic peaks.
The surge in investor interest reflects growing expectations of a supply squeeze. Under European Commission rules, the total number of carbon permits issued to the market is expected to fall sharply, with consultancy ICIS estimating a 15% reduction in 2026 alone. Additional cuts are scheduled this year, alongside the cancellation of allowances previously earmarked for the maritime sector.
At the same time, accelerated permit sales introduced in 2023 to fund €20bn of energy security grants are due to end once revenue targets are met, further tightening available supply.
The positioning has helped drive a strong rally in EUA prices, which have climbed from around €70 per tonne last summer to €86 this week, after briefly touching a more than two-year high above €90 earlier in the month.
Market participants say the tightening supply outlook has created a compelling investment case for carbon allowances, although political risk remains a key factor. Recent debate among European policymakers over the cost burden of climate policy has added uncertainty, with some governments calling for relief measures for energy-intensive industries.
Despite this, carbon market specialists argue that higher permit prices are central to encouraging decarbonisation and capital allocation toward cleaner technologies. Some investors believe prices could rise above €100 per tonne this year if supply constraints intensify.
