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EU Carbon Prices are too low. But they should (and must) rise again

(Energy Post, 15 Mar 2024) European carbon allowances (EUAs) have recently been trading at around €60/t. One year ago, it was at an all-time high of €100/t. Hæge Fjellheim at Veyt explains why, and why prices should – and must – recover.

Economically, the drop is due to two main factors: lower gas prices and shrinking energy demand from industry. Politically, an oversupply of EUAs came from the EU’s REPowerEU plan to accelerate the energy transition and break dependency on Russian gas by partly financing it from sales of EUAs borrowed from future EU carbon allowance budgets. One problem is the low prices hit a major revenue source for the green transition in Europe. And low prices lessen the pressure on actors to reduce emissions. Fjellheim concludes with Veyt’s forecast that prices will hit €160/t in 2030.

One year ago, the cost of emitting one ton of carbon in Europe reached an all-time high of €100/t. European carbon allowances have recently been trading at close to half of that level and currently linger around €60/t. Lower prices minimise both the appetite to reduce emissions and the funds that will help finance the green transition. But a price recovery is on the cards.

Lower gas prices and shrinking energy demand from industry

Like in any other commodity market, prices respond to changes in supply and demand. In carbon markets, demand is fundamentally guided by emissions – and they are down in the sectors covered by the EU emissions trading system (EU ETS). Substantially so. Power sector emissions decreased 20 percent last year and the decline has continued into 2024. This is due to two main factors: lower gas prices and shrinking energy demand from industry.

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Energy Post, 15 Mar 2024: EU Carbon Prices are too low. But they should (and must) rise again