As oil nears the portentous $100 mark, the milestone is only symbolic in the eyes of CO2 traders. Oil was last at current levels just shy of the $100 a barrel mark in September 2008, a time when EUAs were trading at just above €23, before the worst of the economic downturn. Traders and analysts said carbon is unlikely to take direction from rising crude oil prices, even though strength in the commodity to differing degrees can influence rises in gas, coal and power prices.

“There’s far too many other things going on in the carbon market that are having a much bigger impact right now than the influence of a spike in energy prices on the price of carbon,” said Emmanuel Fages, an analyst with Societe Generale.

He highlighted the current surplus in EU carbon allowances (EUAs) hanging over the market, increasing CER supply and the European commission’s proposed restrictions on the use of most industrial gas CERs in the ETS after 2012 as being the main reasons for price weakness in EUAs.

Fages pointed out that oil’s correlation to carbon prices has been loosening for years, long before oil last hit this week’s peak of nearly $99/ bbl for front-month Brent crude. And, perhaps of more fundamental importance for many in the carbon market, the positive correlation between EU allowances and power prices has also unravelled, most noticeably in the past two months.

For instance, the correlation between December 2011 EUAs and German baseload power, which for much of 2010 ran between 50 and 75 per cent, collapsed from November onwards.

Data supplied by Societe Generale shows there is now little correlation between the two as EUA prices, well-below their 2010 highs, struggle to rise above €15 despite a recent six-month high in the price of baseload German power for next year delivery.

“With the end of the second phase approaching, carbon is trading more as a standalone, independent commodity rather than as a function of gas and power prices. We are back to real CO2 fundamentals,” said one trader with a large commodities trading house, who requested anonymity.

Broken Relationships

The correlation between crude oil and carbon, which in 2010 oscillated wildly between a fairly strong to a very weak relationship, crumpled to near zero in the final months of last year.

Meanwhile, the relationship between natural gas prices and EUAs, which moved in tandem around 50 per cent of the time during certain periods in 2010, also fell away before the end of last year.

Last month, the inverse relationship between coal and EUAs strengthened to almost -50 per cent, meaning that on an increasing number of days in December, whenever coal rose, carbon fell by half as much.

But stronger gas prices during the same period, in theory, should have undermined the impact of more expensive coal.

Energy prices are unlikely to have much of an impact on EUAs when the market is oversupplied, said Barclays Capital’s Trevor Sikorski, who estimates that the current phase of the EU ETS (2008-2012) will have a total surplus of 400 million permits.

“When the market becomes short, then energy prices will become a much more important factor influencing carbon prices,” he added. But some observers think that the decoupling of carbon prices from energy prices might be temporary – despite the market’s surplus.

“I think the lack of correlation between EUAs and energy commodities towards the end of 2010 was most likely due to the carbon market temporarily paying more attention to itself as the expiry of December 2010 contracts approached,” said Harry Hazeel, an analyst with London-based brokers CarbonDesk.

He added: “Up until the end of November there was still a strong correlation between the Dec-10 EUA contract and European power, and I would be surprised if there was a major breakdown of the relationship in the future given that utilities are still the largest emitters within the EU ETS.”