EU carbon prices touch four-month lows as free allocation headlines deflate bullish expectations

European carbon prices fell to their lowest since the end of September 2025 during morning trading on Feb. 6 as market participants attributed the drop to headlines about potential market intervention, which deflated previous bullish expectations.

EU Allowances touched Eur76.34/metric ton of CO2 equivalent ($90.06/mtCO2e) at 0913 GMT, according to the Intercontinental Exchange, a 6.05% weekly drop.

Carbon permit prices saw sharp declines over the week starting Feb. 2 amid headline-driven moves as various media outlets reported potential softer emission rules under the EU's Emission Trading System.

Free allocations to emitters are currently scheduled to be fully phased out by 2034, but media reports suggested the European Commission was considering an extension, a claim later denied by Kurt Vandenberghe, the bloc's Director-General for Climate Action.

"We are looking at what is the best way to protect against carbon leakage, and we are looking at all the options," he said Feb. 5. Despite the statements, EUAs posted a daily drop of around 6%, according to Platts, part of S&P Global Energy.

The topic of competitiveness across the bloc has been center stage over the past few weeks, but this is not the first time potential extensions to free allowances have made the headlines, with similar proposals circulating during the latter half of 2025.

Amid these discussions, the President of the European Council, Antonio Costa, has invited Council members to an informal gathering next week to discuss strengthening the European single market.

Competitiveness concerns

European competitiveness will be a central topic of discussion at the informal summit, with Costa highlighting in his Feb. 2 letter "the need to deepen, harmonize and further integrate our Single Market", adding several companies across key European sectors, including capital markets and energy, "lack the necessary scale to achieve the levels of investment and innovation needed in a global marketplace".

"In these cases, consolidation in the Single Market, allowing competitive firms across the EU to scale up, is necessary to successfully compete globally," Costa said in his letter. "This effort must always go together with ensuring the affordability and security of services to our citizens and industries."

The informal gathering will be followed by an official Council meeting to discuss competitiveness, scheduled later in February, when ministers are expected to discuss industry and internal markets.

The recent carbon price drop has been amplified by ongoing market jitters stemming from economic and geopolitical uncertainties in January, which have heightened volatility amid US-Iran tensions, deflating the bullish trajectory analysts expect in 2026.

"[The] market is easily spooked at the moment," said a UK-based carbon trader, with another echoing the sentiment, saying that we were currently seeing a "nervous market."

Other signals regarding a potential extension of free allowances came from Jos Delbeke, former director general of the Commission's climate department, known for his involvement in designing the EU ETS and current lecturer at the School of Transnational Governance.

"The EU ETS review is currently the subject of heated discussions," he said in a social media post. "Essential is to use more free allowances for investments in low carbon technology and to prevent major increases in the carbon price."

In a document shared on social media, Delbeke laid out recommendations for the EU's upcoming ETS policy review, including a proposal to redirect a flexible share of allowances.

"The proposal implies up to 259 million mt of additional supply entering the market over 2027-2030, though implementation mechanics and political feasibility remain unclear," said Stefan Kermer, founder of analytics company Carbon Insights.

Amid this shift in narrative, investment funds active in the market have cut net long positions to a two-month low as of the week ending Jan. 30. Funds held 100.6 million EUAs, a weekly reduction of 11.9 million, or down 10.6% week over week.

Some market participants expected sharper reductions, given the EUA price drops over the past fortnight, with one UK-based trader saying, "their longs are stickier than expected".

UK carbon tracks EUAs lower

UK carbon prices also mirrored the EUA price move, trading at a three-month low on Feb. 6, Platts data showed.

UK Allowances reached GBP 55.65/mtCO2e ($75.55/mtCO2, Eur64.05/mtCO2) at 0913 GMT, according to ICE, a 10.08% weekly drop and the lowest since Nov. 7 when compared to Platts price assessments.

Platts assessed the spread between EU and UK allowance at Eur11.93/mtCO2e on Feb. 5, widening by 1.95 euros or 19.54% week over week amid sharper drops in the UKA market.

Market participants are expecting updates about the expected link between the UK ETS with its EU counterpart. Officials are set to meet in Brussels in spring to discuss the wider relations between the two jurisdictions in the aftermath of Brexit.