European carbon prices resumed their rally yesterday after a brief pause on Friday, with EUA Dec’26 briefly climbing to €88.53/t, their highest level since January, before settling at €87.99/t, up 2.89% on the day.

Trading activity also picked up significantly, with 30.8 million allowances changing hands, well above this year’s daily average of around 23 million and nearly double August’s average daily volume of 15.5 million allowances.

Yesterday’s rally in carbon prices once again tracked sharp gains across energy markets, reinforcing the close correlation between carbon and energy prices, particularly natural gas, which had weakened in recent months.

TTF front-month gas surged to its highest level since 2022, driven by escalating tensions in the Middle East. According to analysts at ING, the situation “is deflating hopes of any imminent pick-up in LNG flows from the Persian Gulf, leaving the global LNG market tight and vulnerable as we edge closer towards the northern hemisphere heating season.”

EU gas storage levels stood at just over 68% as of Monday morning, according to data published by GIE, well below the five-year seasonal average of around 84%. Still, with European gas prices trading well above Asian JKM prices, Europe should be in a strong position to attract spot LNG cargoes away from Asia and rebuild inventories ahead of the winter heating season.

Even so, the region could struggle to reach its lower 75% storage target ahead of the winter heating season. Persistently high gas prices could make gas-to-coal switching economics more favourable where coal-fired capacity remains available. As coal generation is more carbon-intensive than gas, any meaningful switch towards coal would increase power-sector emissions and demand for EUAs, providing additional support to carbon prices.

On Tuesday morning, carbon prices edged lower, tracking a similar move in European gas. Despite the modest pullback, ongoing concerns over Europe’s energy supply, together with elevated geopolitical risks, should keep volatility high and continue to lend support to EUA prices.