Weak compliance demand drags EU carbon prices to three-month low

Carbon prices under the EU Emissions Trading System fell to a three-month low in late April due to soft compliance demand and lower interest from the power generation sector.

EU Allowances under the December 2023 contract slumped to Eur85.64/mtCO2e ($94.82/mtCO2e) April 26 before recovering to Eur87.66/mtCO2e by April 28, according to data from S&P Global Commodity Insights.

Bearish momentum reversed in early May amid a delay to planned allocations of extra supply under the REPowerEU agreement intended to offset additional coal-fired generation to save gas.

EUA prices briefly traded above Eur90/mt on the ICE exchange May 2.

UK Allowances, meanwhile, plunged to a 17-month-low with the December 2023 contract assessed at GBP61.26/mtCO2e ($77.04/mtCO2e) April 28.

"The bearish fundamental driven demand is tempering upside from financial investor interest in the market, which has slowed in the past week despite Member States in the EU Council approving EU ETS revisions on April 25 -- the final approval step before legislative changes can become effective," S&P Global carbon analyst Michael Evans said.

Power generation buying interest was also declining amid a fall in gas and power prices, supporting coal to gas switching.

On April 25, the European Council approved a series of climate reforms as part of the Fit for 55 package, which include an overhaul of the EU's Emissions Trading System, the introduction of a carbon border tax, and the launch of a social climate fund, it said April 25. That meant those key parts of climate legislation have finally cleared the lawmaking stage and will now be published in the EU Official Journal and enter into force 20 days later.

The move came more than 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 road transport.

Installations covered under the revised ETS will need to reduce carbon emissions by 62% on 2005 levels by 2030, one percentage point more than proposed by the European Commission and a 44% hike on the current target.

Obligations for shipping companies to surrender allowances will be introduced gradually: 40% for verified emissions from 2024, 70% from 2025 and 100% from 2026. Under the amended ETS, free allowances will be phased out from 2026, just as the CBAM will be phased in. The EU ETS II for road transport and buildings will be in place by 2027 -- a year later than proposed by the EC.

In 2022, regulated CO2 emissions from power plants and factories under the EU ETS fell by 1.2%.

The preliminary data release April 4 by the European Commission surprised many analysts anticipating a slight increase in emissions.

The fall in emissions came despite an increase in power sector emissions as coal-fired power generation rose in the EU after Russia's invasion of Ukraine.

But emissions from non-grid power was down as higher energy prices, rising inflation and ongoing supply chain issues stymied manufacturing growth.

Analysts at S&P Global had forecast 2022 EU ETS stationary emissions to remain flat from 2021 levels at around 1.337 million mt with year-on-year increases from power generation, cement and aviation in 2022.