Carbon prices rose again to new highs of €27.45 tonne. The big increase in carbon prices, was almost certainly caused by the increase in gas prices. Fundamentally, the gas increase is causing generators to use coal and this requires more carbon credits in order to generate. The pricing of these credits is a difficult issue, because all generators have been given 95% (approximately) of their carbon allowance, and so they are holding 95% of allowances which could be used to offset, prices in either gas or power to switch. Most companies are however, applying the price to the whole of their carbon position (in terms of risk management this is correct) and the risk models are suggesting that they should hold them, because the price of the option to generate in either fuel is worth so much, that the options market is being priced into the underlying. Clearly, this is something which hedge funds and banks will exploit gearing forward underlying positions to account for a weak untransparent options market. At some point soon, fundamentals, will see options, backwardation and true arbitrage between commodities, but that will only happen when the carbon crash occurs.