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9. The price drivers

Basics 2

Multiple factors such as the weather, energy prices, or industrial activity can affect EUA prices.

9. The price drivers

European Carbon Allowances follow the law of supply and demand. Their price is determined by the quantity of permits available in the market and the level of demand for these permits. As the supply drops and the asset increases in scarcity, the price gets higher. In the short term, multiple factors can affect demand, such as the weather, energy prices, or industrial activity. 

Political Decisions

EUA supply is determined by the EU institutions. They set climate targets and compute how much allowances can be issued in order to attain those. The volumes, the frequency and any other EUA issuance parameters impact the “supply” side of things and affect the price levels. 

Abatement Technologies 

Abatement technologies are the “decarbonation” solutions that industries can put in place. These industries always face a trade-off between purchasing EUAs or investing in decarbonation solutions which reduce their exposure to EUAs. As EUAs become more expansive, industries invest in abatement technologies, reducing demand. 

Energy Markets

Carbon allowances react a lot to what happens in the power sector. Higher prices could make industries choose cheaper, more polluting energy mixes. Those would be more CO2-producing, requiring them to surrender more EUAs. This increases the demand and the price of carbon allowances. 

Socio-political factors

“Energy markets” is a broad notion, depending on a multiplicity of other elements. Political events like the war in Ukraine impact supply. Social happenings like strikes on plants in Australia also affect the markets. Technological findings can result in energy mix switches. 

Weather

Warmer summers and colder winters require more energy for respectively cooling buildings down and heating them. This is highly energy consuming, and in turn increases emissions, demand for EUAs and allowances prices. 

Industrial Output

Finally, carbon markets exist within broader macroeconomic dynamics. The players are affected by inflation, equities, politics, real estate, which all impact industrial activity to a certain extent. If industrial activity is reduced, so is the demand for EUAs. Hence, global trends, deceleration, recession, episodes of prosperity etc. are reflected in EUA price movements. 

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