Carbon Tumbles Most in Almost a Decade as War Spooks Investors

(Bloomberg) -- European carbon permits plunged the most since 2014 as investors are fleeing a market once considered a one-way bet on stricter pollution rules in the region. 

Speculators on Monday pulled $86 million from the largest ETF fund that invests in emissions markets. Futures are also under pressure as surging natural gas prices may force industrial users to curb output and thus reduce pollution. 

The withdrawals from the KraneShares Global Carbon Strategy are a signal that speculators are pulling away amid the turmoil in global financial markets spurred by Russia's war in Ukraine. The financial repositioning has helped push the European emissions price down by almost a third from its peak at the start of last month. 

The ETF saw its first ever outflow last week after drawing over $1.8 billion since its July 2020 launch. About two thirds of the fund's assets are in EU and U.K. futures, with the rest invested in U.S. markets. 

EU futures slumped as much as 20% to 66 euros per metric ton on ICE Endex in Amsterdam. That's the biggest drop since March 2014. It pared some of the losses late afternoon. 

Natural gas prices have jumped almost 75% this year, and that huge gain may force some traders to sell carbon to cover rising margin calls on other positions. 

Until the latest decline, many analysts were expecting much higher prices as climate policy in Brussels guaranteed a tighter market in the coming years. That led a swarm of investors to pile into the market, pushing the price up nearly 150% last year and close to 100 euros at the start of February.

There may also be some fundamental reasons why carbon is dropping. Germany said it plans to speed up the deployment of wind and solar farms this decade so that it gets 100% renewable electricity by 2035, which would eliminate a huge source of demand for the permits. A potential extension of its nuclear reactors would also sap demand for emission rights. 

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