Insight Focus
EUAs reached a four-month high amid tensions between Iran and Israel. However, the outbreak of conflict triggered EUA selling to fund more gas speculation. EUAs remain above EUR 70 as analysts point to tighter market conditions from 2026.
European Carbon Prices Plunge as Tensions Ease
European carbon prices have slumped by more than 7% over the past fortnight as geopolitical tensions in the Middle East have eased, triggering a sell-off in energy markets that has fed through into the EU ETS.
EU Allowance prices surged to a four-month high of EUR 76.75/tonne on June 13, amid a market-wide rally in energy prices after news emerged that Israel had carried out bombing raids on Iranian military and nuclear facilities.
Source: ICE
Brent crude oil jumped as much as 27% between May 30 and June 19, while front-month TTF natural gas rose more than 19%, as energy traders worried that Iran might retaliate by blocking the Strait of Hormuz, through which a significant portion of the world’s seaborne oil and gas passes.
Source: Investing.com
Carbon traders pointed out that EUA prices had started to decline from their peak, even as oil and gas continued to rise. Typically, carbon has tracked natural gas prices, since its chief function in the power sector is to try to ensure that coal remains priced out of the generation merit order.
The theory is that when gas prices rise, making the fuel less competitive for power generation, carbon prices should also rise in order to maintain gas’ price advantage over coal. This means that, over time, EUA and TTF prices in Europe should remain closely correlated.
The early decline in carbon prices, relative to gas, was partly attributed to speculative traders liquidating their EUA positions to free up capital that could be deployed into more volatile assets such as gas.
This was borne out by weekly positions data showing investment funds had boosted their net long position in natural gas to 190 TWh from 137 TWh in the week ending June 20, while reducing their net long position in EUAs to 23 million tonnes from 28 million.
The sharp rally in oil and gas prices ended on June 19 with the agreement of a ceasefire, and by June 27, the prices of the two leading futures contracts had fallen by 15% and 21%, respectively.
EUA Supply Set to Tighten by 2026
The last few days have seen the gas and carbon markets dominated instead by technical trading relating to the June options contracts, and since the expiry of both TTF and EUA options, prices have remained under pressure.
EUAs have found support at the psychologically important EUR 70 mark. It is possible that, with the next major event in the EU ETS being the annual compliance deadline at the end of September, the next three months could see steady buying by industrials as they top up their accounts ahead of the deadline.
Furthermore, numerous market analysts are emphasising that EUA market supply is set to become fundamentally tighter in 2026. With the launch of Europe’s Carbon Border Adjustment Mechanism, there is a likelihood that larger importers will seek to hedge their CBAM exposure by buying EUA futures.
Although EUAs are not eligible for CBAM compliance, importers will need to buy CBAM certificates equivalent to the greenhouse gas emissions embedded in their imported products. These certificates will be priced at prevailing EUA levels. This creates a role for EUAs as a hedge against fluctuations in CBAM costs, potentially attracting new participants to the EU ETS.
Additionally, as CBAM is rolled out and applies costs to imported materials, the free allocation of EUAs to European producers of those same products will start to decline, ultimately reaching zero after 2030.
Secondly, the REPowerEU fundraising programme is expected to come to an end in August 2026, after which auction volume will decline markedly. REPowerEU is taking 250 million EUAs from the 2027-2030 annual caps and selling them between 2023 and 2026.
The upshot is that supply between 2027 and 2030 will decrease by approximately 62 million EUAs per year, in addition to adjustments to the overall market cap and stricter benchmarks for free allocation to EU industrials.
