Market Overview

This week saw significant political and market developments across carbon pricing systems, energy transition efforts, and global security. As Europe considers integrating carbon markets and Germany embeds net-zero into its constitution, global climate data delivered a stark warning. Meanwhile, trends in energy consumption and biofuel mandates reshaped renewables policy, and geopolitical discussions on Ukraine hinted at tentative diplomatic progress. Here is a breakdown of the major headlines from Week 12.

Carbon Markets

Calls to link the EU and UK carbon markets gained traction this week as the EU-UK Parliamentary Partnership Assembly urged both governments to consider linking their emissions trading systems (ETS). The renewed push ahead of a May summit follows comments from the UK Treasury indicating openness to exploring such options. A linkage would allow carbon allowances from either market to be traded across both systems, potentially raising UK prices to align with the EU ETS. Following these developments, UK carbon futures for December surged by 5.7%, reaching £46 per tonne. A linkage could enhance liquidity, reduce volatility, and foster greater alignment in climate policy across the Channel.

Renewables and Biofuels

Germany's energy consumption fell by 1.1% in 2024, continuing a downward trend driven by mild weather and an economic slowdown. According to AGEB, energy use dropped to 359.6 million metric tonnes of coal equivalent, just under 30% below its 1990 peak. A significant drop in coal usage—10% for both hard and brown coal—was attributed to increased renewable energy production and greater electricity imports. Renewables now supply over half of Germany’s power, comprising roughly a fifth of primary energy use.

In solar, Germany added an estimated 1.535 GW of capacity in February, including new and retroactively registered installations, reflecting the country’s ongoing solar expansion.

Meanwhile, Northwest Europe’s HVO paper market reached record highs this month, driven by policy shifts and increasing biofuel mandates. On 14 March alone, 42,000 tonnes of Class II hydrotreated vegetable oil (HVO) futures were traded, with 120,000 tonnes traded in the first half of March, nearing previous monthly records. While physical demand was moderate, forward liquidity was fuelled by anticipated carryover changes, German and Dutch policy adjustments, and high feedstock prices. Strong import flows from East of Suez, tighter UCO supply, and volatile price spreads all contributed to market activity.

Macroeconomics and Trade

In a significant shift, German lawmakers passed a landmark spending package to unlock hundreds of billions of euros in debt-financed investments. Backed by centrist parties, the plan includes €500 billion for infrastructure and military upgrades while exempting defence spending from Germany’s fiscal rules. This move ends decades of budgetary restraint and is seen as a critical response to both economic stagnation and geopolitical threats. The legislation also embeds Germany’s 2045 net-zero goal into the constitution, reinforcing the country’s long-term climate commitments.

Amid global climate concerns, the World Meteorological Organization (WMO) reported that global temperatures reached 1.34°C–1.41°C above pre-industrial levels, with 2024 likely to surpass the 1.5°C threshold. Though individual years above 1.5°C do not yet signify a breach of the Paris Agreement, the WMO emphasised the growing risks to human and planetary health. Rising CO2 levels, increased ocean heat, and doubling sea-level rise rates underscore the urgency for action.

Geopolitical Developments

President Putin refused to agree to a 30-day Ukraine ceasefire proposed by the United States but committed to limiting attacks on energy infrastructure. Despite not securing a full ceasefire, President Trump hailed the outcome as a win, describing it as a step towards broader negotiations. Trump’s envoys will continue talks in Saudi Arabia, aiming to develop a maritime and infrastructure ceasefire. Ukraine’s President Zelensky said he would consider the offer if the United States played mediator, though he remained cautious. Russian drone attacks on Kyiv continued, striking civilian infrastructure and casting doubt on Putin’s intentions. Still, the diplomatic opening has momentarily eased concerns over Trump making greater concessions to Russia, with critics noting that avoiding recognition of Crimea or major deals is, for now, a political win.

Key Takeaways

The EU and UK are exploring renewed carbon market integration, potentially enhancing trading efficiency and aligning climate policies post-Brexit. Germany recorded a further decline in energy use and made gains in solar expansion, while HVO paper trading reached record highs driven by policy momentum. On the economic front, Germany passed its largest spending plan in decades, linking fiscal reform with climate and defence goals. Global climate data from the WMO signalled that 2024 may have breached the 1.5°C threshold, reinforcing the urgency of emissions reductions. Meanwhile, geopolitical talks between Trump and Putin opened the door for ceasefire discussions, though active hostilities persist in Ukraine.