UK, EU carbon price rally stalls amid US tariff concerns

European and UK carbon allowance prices rose steadily during the week ending May 23 as markets turned their focus to the linkage of the two emissions trading systems.

But by late afternoon trading, some of these gains had reversed after US President Donald Trump said he was recommending a 50% tariff on imports of all goods from the EU starting June 1.

The news of US tariffs fueled bearishness across commodity and energy markets, especially the European gas, power and carbon complex.

The EU and the UK agreed on May 19 to work toward linking their respective ETSs, with observers welcoming the decision as a significant step forward in negotiations after the UK left the EU in January 2020.

The UK carbon price has rallied following the announcement, narrowing its discount to EU Allowances. UK allowances have traded at a persistent discount to EUAs over previous years amid oversupply in the market. However, participants have highlighted that a linkage could improve liquidity in the market.

UK Allowances were trading at GBP52.48/mtCO2e ($71.01/mtCO2e) at 1520 BST, up around 9% from the May 16 settlement, according to Intercontinental Exchange data.

"The perception is that the price will converge in the direction of EU prices," a UK-based carbon trader said. He further highlighted that a plethora of questions remained around how and when the linkage will happen.

Platts assessed the UKA contract for the nearest December 2025 delivery at GBP53.19/mtCO2e on May 22, down 2.9% on the session.

Speaking on the day-over-day fall, a carbon analyst said that the "honeymoon period" may be over.

"You see this happen every time. You get news, the price goes up, there is a correction, but the price won't return to where it was before."

Analysts at S&P Global Commodity Insights expect UKA prices to stabilize in June following the linkage outcomes.

"UKA prices are expected to fall slightly (5%) in June following the UK-EU summit outcomes, before stabilizing around GBP50/mtCO2e in Q3 2025 due to rising gas prices and reduced UKA supply offsetting lower summer thermal power generation," analysts said in a recent market note.

EUAs gain ground

EUAs also rose after experiencing some volatility throughout the trading week, with the market largely following the wider energy complex.

EU Allowances were trading at Eur71.90/mtCO2e ($82.70/mtCO2e) at 1533 BST, ICE data showed. Platts assessed the EUA contract for the nearest December 2025 delivery at Eur72.13/mtCO2e, down 56 euro cent from the previous settlement.

The EU Parliament voted on simplifying the bloc's carbon border adjustment mechanism during a May 22 plenary vote, with an overwhelming majority in favor of endorsing the Omnibus package. The policies will adjust CBAM by moving to mass thresholds and adjusting the timeline for mandated entities to buy certificates.

Speaking about the parliamentary vote and the UK-EU ETS linkage news, a carbon trader told Platts this was bullish for the EUA outlook.

He added that the linkage had a short-term bearish impact on EUAs, with prices dropping during May 21 and May 22 trading.

"EUA prices dropped because the idea is they will converge [with UKAs], so people were using UKAs to manage EUA exposure, increasing UKA demand," the trader said.

Auction volumes fall

The European Energy Exchange will run a reduced auction schedule next week, which may support prices due to the reduced supply of allowances.

"It should be supportive, but as it was scheduled a long time ago, most of the impact should already be priced in," a carbon trader said. "Should any external factor come into play, like weather forecast/industrial news etc., it could exacerbate it."

Only two auctions are scheduled for the week starting May 26.

"Should the maintenance operations in Norway last longer than expected, the EUA December 2025 [contract] could continue going up and potentially pass above Eur75/mt," analysts at BRS Shipbrokers said in a recent market note.

The longer-term outlook for EUAs remains bullish. Analysts at Commodity Insights expect prices to gradually rise to Eur100/mtCO2e by 2030.

"The market parameters leading up to 2030 are defined by the 2023 ETS directive. Based on these assumptions and our economic outlook in the Commodity Insights Planning Case, the price of EUAs is expected to increase gradually, reaching Eur100/mtCO2e by 2030," the analysts said in a recent note.