Insight Focus

• Reduced demand for permits reflects fall in power demand
• Industrial buying also on the wane amid looming recession
• Carbon price has fallen from more than €100/tonne to around €85

European carbon prices are forecast to average €83.55 in 2024 and €88.95 in 2025, according to a poll of analysts conducted by Reuters.

The latest predictions represent declines of 9.9% and 11.3% respectively from previous forecasts made in July this year. Analysts also predicted EU Allowances (EUAs) would average €102.97 in 2026.

Prices have averaged €87.75 to date in 2023, with most analysts expecting them to end the year slightly lower than current levels. EUAs briefly topped €100 in February as the European Union approved measures to tighten the market as part of its drive to achieve net zero emissions by 2050.

The lower price predictions for 2024-2026 reflect the sharp drop in emissions seen so far in 2023, triggered by strong growth in zero-carbon renewable energy generation, a significant fall in electricity demand as well as switching from coal-fired to gas-fired generation.

To these has been added the impacts of a growing economic downturn on industrial activity, as rising interest rates raise costs and declining spending trims output.

The power industry represents the largest single industrial sector in the EU’s Emissions Trading System (ETS), accounting for more than half the 1.285 billion tonnes of CO2 equivalent emitted in 2022, according to the EU Environment Agency.

Since the start of the war in Ukraine, energy demand has fallen amid soaring energy costs, reducing the load at power stations across the EU and cutting demand for EUAs in the short term.

According to data from the Fraunhofer Institute, overall power generation across the EU in 2023 has fallen by 5.3% from the first nine months of 2022. Within this total, coal-fired supply has dropped by 25% and natural gas-generated power is down by 15%.

Conversely, generation from wind, solar and other renewable sources is up by 5.7% so far in 2023.

The upshot is that industry and power needs to buy fewer EUAs to cover their carbon emissions, leaving the market relatively longer than expected and prompting speculative investors to build up short positions in EUA futures, betting on further declines in the price.

While the EU ETS operates a supply control mechanism to manage oversupply, market participants are concerned that the successive impacts of Covid, the Ukraine war and now persistently higher energy prices have deeply affected industrial activity in the region and may be “hollowing out” the EU’s industrial base.

S&P Global’s HCOB Eurozone Purchasing Managers Index reported at 43.5 in September, the 15th successive negative readout, and analysts at Morgan Stanley this week estimated that industrial CO2 emissions for the period 2023-2030 is down by 14% compared to forecasts made in 2021.

Market participants meeting this week at a carbon markets event in London talked of Europe risking “de-industrialisation rather than de-carbonisation”.

Prices for EUAs remain broadly stable between €80-90, with the consolidation reflecting tension between those who take a longer term view that the widening of the EU ETS to include maritime shipping emissions and aviation will boost demand for EUAs, and those who are concerned that even this injection of additional demand may not be enough to outweigh the decline in industrial and power demand.