An overview of the recent carbon allowance price decrease. 2024 EU ETS forecasts and what stands behind the expectations on the rise..
In the initial months of 2023, the European Union Allowance (EUA) market had prices that remained fairly constant, oscillating around 80€. Participants were indeed recovering from market shocks from the preceding months. Investors needed time to digest the great fluctuations in energy markets from the beginning of the war in Russia. They were too uncertain to take big positions in carbon markets, facing fears that the broad geopolitical conflicts could bring renewed surprises. This is why the European Union Emissions Trading scheme (EU ETS) market seemed to stagnate at the beginning of 2023.
In the latter part of 2023, EUA prices started to decline, concluding the year at approximately €70. This decrease was primarily due to reduced industrial activity, resulting in less carbon dioxide emissions during production processes. In turn, this lowered the demand for EUAs. Additionally, this year’s winter is milder than usual, which depressed energy consumption due to heating. Less power generation means less CO2 emitted, hence lower EUA demand. Finally, the correlation between EUA prices and gas prices was almost perfect at the end of the year. The decline in gas prices exerted additional downward pressure on EUA prices during this period.
Since the start of January, EUA prices have experienced a further 20% decrease, following the trends that were already there at the end of 2023 - a milder winter, ongoing low industrial activity, and an increase in renewable energy generation. CO2 allowances prices kept on decreasing until the end of February, reaching €50.56 on February 25th.
As of March 2024, the carbon allowance price is €58, and we can expect prices to reach at least €65 by the end of Q2 of 2024. This can happen notably if speculation actors resume their buying activity and close out their short positions (33.5Mt currently).
Analysts projecting an average increase to €70.55 by the end of the year. This would represent a 11% increase from current levels. The range of forecasts from 14 experts spans from a low of €61.95 to a high of €82 as a price expectation by the end of the year. These predictions are so different because carbon market prices are influenced by a multitude of factors such as regulatory changes, weather patterns, economic conditions, and energy markets.
The downward revision in the poll of analysts is explained by a diminished activity in the industry and power sector. There was a 21% year-on-year decrease in fossil fuel-based electricity generation in the EU during 2023. So, there were less emissions from the power sector and less demand for EUAs. Should this activity resume at a usual pace in 2024, this can bring optimism for EUA prices in 2024.
In the weeks to come, there will be significant policy announcements from the EU Commission regarding climate targets. They will shed light on the region's ambitions to combat global warming with a 2040 horizon. The level of ambition outlined in these targets is expected to have a direct influence on the EUA price levels.
Indeed, in the past, such important regulatory announcements have had an impact on carbon allowance prices. For example, at the beginning of 2023, EUA prices were on the rise following the introduction of the ambitious Fit for 55 targets.
Having started a first stage of operation in 2023, the Carbon Border Adjustment Mechanism aims at keeping European competitiveness. This means that it makes importers pay for the carbon-intensive goods that they import from outside of Europe. The idea is not to make European polluters pay too much for carbon while importing “polluting cheaper goods” from outside of the Union. Carbon Markets analysts expect this mechanism to have an impact on carbon pricing globally. It is anticipated that non-European countries will also introduce Emission Trading Schemes. This is likely to push carbon prices higher at an international level. Hence, we can expect this to have an upward pressure on European Allowances prices to the upside as well.
Post-2024, it is projected that prices will keep rising, anticipating an average of €80 by the year-end of 2025. This is to be followed by an increase to around €100 by the end of 2026. The steady upward trend is expected to further continue and levels are forecasted to reach at least €140 by the year 2030 (13% annual growth rate).
Beyond 2030, carbon prices are expected to keep increasing up to €200 and more.Previously, we mentioned that EUA supply volumes were increased after the beginning of the war in Ukraine. This is a measure aiming to facilitate Europe’s energy independence and its faster shift to greener energy sources. However, this supply increase will no longer prevail in the market in the last years of the decade. The end of the increase in supply is expected to introduce upward pressure on EUA prices. At the end of the day, the objective of regulators remains to make industrials face higher carbon costs and incentivize them to decarbonize.
Additionally, sectors like aviation and maritime shipping will no longer be given free carbon allowances. They will be more exposed to the market and will increase their demand for EUAs. This is likely to bring prices to the upside, too.
Sources:
Euractiv, 2024. Brussels eyes 90% climate goal for 2040, 11 EU countries call for ambition
The European Commission, 2023. Carbon Border Adjustment Mechanism
ICAP, 2023. EU adopts landmark ETS reforms and new policies to meet 2030 target
Trading Economics, 2024. Euro Area Manufacturing PMI.
The Washington Post, 2024. The world is already experiencing record heat — in January
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