(Bloomberg) -- European carbon fell below €55 a ton for the first time in more than two years as falling gas prices combine with mild weather and soaring renewable energy production to sap demand for permits to pollute. 

Benchmark carbon futures have dropped 44% in the past 12 months. It’s a decline that reverses years of expectations that the European Union carbon price could only rise as the bloc ramps up its climate goals. 

Carbon futures for December fell as much as 6.7% on Monday to €53.37 a ton on ICE Endex exchange, the lowest since August 2021. 

Power stations and industrial companies in Europe need a carbon permit for each ton of CO2 they release into the atmosphere. The price soared in recent years as the EU stepped up plans to effectively eliminate emissions by the middle of the century. But with the industrial slowdown following Europe’s energy crisis, demand for permits has been lower than previously anticipated. 

“Carbon’s weakness is an echo of a broader softening of energy markets and continued pressure from investment fund positions extending their net shorts,” said Marcus Ferdinand, chief analytics officer at Oslo-based Veyt. “With the European Commission cutting the bloc’s growth forecasts, the prospect of an extended gloomy macroeconomic picture will likely continue to weigh on industry and, by extension, carbon.”

Some market players expect the decline to continue. Short positions by investment funds hit a record in data released last week and open interest for options that carbon will fall below €50 have soared this year to more than 10,000 lots, a level nearly 10 times as high as at the beginning of December. 

Veteran hedge fund manager Per Lekander told Bloomberg last week that the permits should be worth as little as €35 a ton.

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