Prices for permits under the European Union's emissions trading scheme have nearly doubled since hitting a low of €8 in February.
The permits, called EU Allowances (EUAs), reached a new four-month high of €16 this week, before easing to around €15 on Wednesday.
European Central Bank President Jean-Claude Trichet said this week that European economic growth was at a turning point and some countries were seeing a rise in gross domestic product.
Oil and CO2 prices 'disconnected from fundamentals'
Analysts said the carbon market has mirrored equity and oil gains over the past month in reaction to some signs of an improving global economy, but the underlying factors affecting carbon's supply and demand balance are still bearish.
A reinvigorated world economy would imply more energy consumption and industrial output, and therefore higher greenhouse gas emissions and more demand for carbon permits such as EUAs.
"We are all a bit puzzled why EUAs have rallied so much," SocGen/Orbeo analyst Emmanuel Fages told Reuters.
"For oil, as for carbon, price levels seem increasingly disconnected from fundamentals," he wrote in a research note this week.
US crude oil futures touched a 6-month high of $60.08 a barrel on Tuesday as traders focused on expectations of economic recovery rather than underlying inventory levels which are historically very high.
Many carbon analysts foresee a market surplus in EUAs in 2009 and 2010 as the global downturn has crippled European industrial production, prompting them to reassess EUA demand.
A surplus in the scheme's first phase (2005-2007) caused EUA prices to crash to zero. Data from the EU executive Commission published in April showed that companies emitted more CO2 then their allocated EUA quota in 2008.
Fundamentals still weak
"From a fundamental macro-economic point of view, the news has continued to be unrelentingly negative over the last three months," Deutsche Bank analyst Mark. C. Lewis said in a report.
Lewis said utilities and speculators could start to buy EUAs before the middle of next year in anticipation of a tighter market in the third phase (2013-2020), when many installations will have to buy a majority of their permits at auction.
"We think that EUAs will only start to reflect fundamentals when generators' Phase 3 compliance buying begins in earnest (mid to late 2010)," he said.
EUA prices have also not reacted as expected to recent bearish news, and that could affect an EU vision for a linked global market.
That could be a big plank of a new international climate treaty to replace the Kyoto Protocol after 2012, which faces a tight deadline for agreement in Copenhagen this December.
"We have had some bad news like the Australia delay and low cement and steel output, but the market has not paid attention to that," said Jean-Francois Cauvet, a trader at France's Sagacarbon.
Australia announced last week it would delay the start of its trading scheme to July 2011 to ease the burden on industry during a recession.
"I think most analysts have missed why we've moved up to these levels. We could see some consolidation (and) dropping back to 13 or 14 euros is not impossible," said Fages.
In a recent report, Point Carbon analysts said prices are likely to fall again as utilities' hedging activity dies down. It forecasts an average EUA price of 12 euros for 2009.
(EurActiv with Reuters)
