Several traders are turning to swaps to hedge volatile EU carbon prices as the bloc’s Carbon Border Adjustment Mechanism creates new risks for importers of carbon-intensive goods, according to Rob McLeod, head of energy price risk solutions at global commodity trading house Hartree Partners.
This derivative instrument allows buyers to lock in fixed prices for CBAM certificates in advance, providing a direct hedge against price swings in the underlying EU Allowances market.
“CBAM swaps provide a clean and direct hedge but require a credit line,” McLeod said on a webinar on March 3. “A swap is a simple tool to lock in a fixed price level ahead of time.”
EUAs have experienced sharp moves in recent weeks as politicians increasingly focus on the economic damage from the EU Emissions Trading System, leading to a collapse in market confidence.
“EUAs can be exceptionally volatile, even in the short term. We can see moves of Eur20-30/mt over a 30- to 60-day period. That is not uncommon, which makes hedging more necessary,” McLeod added.
EUAs have slumped by more than Eur20/metric tons of CO2 equivalent in recent weeks after several member states called for watering down the EU ETS to boost the bloc’s industrial competitiveness. Platts, part of S&P Global Energy, assessed EUAs for the December 2026 contract at Eur73.80/mtCO2e on March 2.
Hedging strategies
CBAM swaps are derivative instruments that allow buyers to fix forward CBAM certificate prices. Under the structure, buyers agree to a fixed price and cash-settle at the end of the contract period against a CBAM index price.
The EU’s CBAM transitioned to its definitive phase from Jan. 1, 2026, marking the world’s first operational carbon border tax.
The CBAM swap market is showing signs of liquidity growth, with significant volumes already trading daily, according to McLeod.
Hartree Partners is an active participant in the EU ETS and is exposed to the bloc’s CBAM while also actively hedging EUAs for CBAM compliance.
This hedging strategy is used by exporters and importers of CBAM-covered goods to manage their exposure to CBAM certificates.
Importers of carbon-intensive goods from six sectors — aluminum, cement, electricity, fertilizers, iron and steel, and hydrogen — now face financial liability for their products’ embedded emissions, though the purchase of CBAM certificates reflecting the carbon content of their imports only starts in February 2027.
CBAM certificates are priced against EUAs, making carbon price volatility a key concern for companies importing covered goods into the EU.
Besides swaps, McLeod also outlined two more solutions for companies seeking to manage CBAM exposure, each with distinct advantages and limitations.
Using EUAs as a hedge appears straightforward given CBAM certificates are priced against the carbon allowances, but final CBAM pricing may diverge sharply from EUA values, creating basis risk, McLeod said.
Virtual certificates represent another option, mainly focused on spot purchases. This approach “eliminates basis risk” but generally requires “upfront payment,” limiting flexibility for companies managing cash flow, McLeod said.
