EU carbon prices back near Eur90/mt as compliance demand softens

Carbon prices under the EU Emissions Trading System fell steadily amid fading compliance demand and weakening fundamentals.

EU Allowances under the December 2023 contract were trading at Eur90.95/mtCO2e ($99.85/mtCO2e) at 1114 GMT on April 21, compared to a week ago when the contract settled having settled at Eur93.84/mtCO2e on April 14, ICE data showed.

EUAs for December 2023 have traded at a range of Eur90-97/mtCO2e so far in April compared to last month, when they were very volatile, oscillating between Eur87-100/mtCO2e.

Platts, part of S&P Global Commodity Insights, assessed EUAs for December 2023 at Eur91.96/mtCO2e April 20.

Analysts said momentum was starting to favor the fundamentals, with the supply build up and compliance demand beginning to wane.

S&P Global carbon analyst Michael Evans said prices are likely to continue a downward trend next month on increased auction volumes in July from the REPOwerEU deal, along with weaker economic growth prospects.

"The downward drift in EUA prices this week had correlated to reducing operator EUA net length positions, as participants fulfil 2022 compliance obligations before the end of this month; and separately an updated data release by the European Commission on free allocation issuances, which indicate more than 75% of 2023 allocations have now been delivered," Evans added.

Key reforms

This week, the European Parliament formally approved reform of the EU's Emissions Trading System and the introduction of a carbon border tax, both of which will revamp the bloc's carbon market, and impact global trade.

But this development did not really affect EU ETS prices this week.

The votes came four months after negotiators agreed to reform the EU's ETS, increasing carbon cutting ambitions to 2030, detailing the removal of free allowances and confirming the inclusion of maritime shipping and a new ETS II for buildings and transport.

Under the amended ETS, free allowances will be phased out from 2026, just as the CBAM will be phased in.

The allowance auctions under the REPowerEU deal are expected to commence in July, which will put some pressure on prices due to an increase in the supply of allowances.

"For our EUA price view, lower-than-expected auction volumes brought forward in 2023 may keep monthly average prices higher than our current forecast this year, but we still expect a bearish trend in Q2 as participants prepare for increases in the monthly auction volume from July," Evans added.

The European Council had recently formally adopted REPowerEU, which confirmed that more money for member states would be raised through the EUA allowance auctions.

Under this package, Eur20 billion will be made available to finance the investments and reforms. But out of this, 40% of Eur20 billion -- Eur8 billion -- will be frontloaded or allocated at EU carbon allowance auctions, earlier than previously planned. The other 60% will reallocated through the Innovation Fund.