Colder weather, renewed demand could push EU ETS prices closer to Eur80/mt

Carbon prices under the EU Emissions Trading System are starting to show signs of a demand recovery after a volatile few months, with analysts and traders expecting more upside amid higher European gas and power prices aided by colder weather.

European allowances for December were trading at Eur76.95/mtCO2e ($83.97/mtCO2e) as of 1144 GMT on Nov. 24, down from a settle of Eur76.55/mtCO2e Nov. 17, ICE data showed.

Earlier in the week, EUAs slumped to Eur75.13/mtCO2e on Nov. 22, the lowest EU ETS price in exactly a year, according to Platts, part of S&P Global Commodity Insights,

Platts assessed EUA contracts for December delivery at Eur76.59/mtCO2e on Nov. 23, down from Eur77.01/mtCO2e Nov. 16.

Demand for EUAs is starting to show some resilience after almost two months of feeble buying interest, as reflected in this week's auction activity.

The latest weekly Commitment of Traders data also showed that investors had reduced their net short positions for the first time in over a month, another sign that a price recovery is due.

Cold temperatures

Europe is also set to undergo a cold spell in the coming days, with temperatures going a few degrees Celsius below their five-year averages, according to latest CustomWeather data.

Analysts at S&P Global said these cooler temperatures present an upside to European power demand, supporting EUAs.

"Cooler conditions have brought about a broader uptick in domestic demand across Europe, with improved structural length presenting some power price insulation in the face of bullish natural gas prices," they said in a recent note.

In policy news, there were further developments for the wider industry on supply for 2024.

The European Commission recently confirmed that 244,422,500 carbon allowances will be auctioned by member states from January to August 2024. The Commission also said the final quantity of allowances to be auctioned between September and December 2024 will be finalized by July 31.

On Nov. 21, the European Parliament approved a certification framework for carbon removals to help the bloc reach its climate goals and combat greenwashing.

The bill, designed to expand EU's capacity to quantify, monitor and verify both tech-based and nature-based carbon removals, will be sent to member states and the European Commission for negotiations.

Carbon removals, also known as CO2 removal, or CDR, refers to climate mitigation strategies that remove CO2 emissions from the atmosphere, as opposed to strategies to avoid such emissions.

UK rebound

UK Allowances, or UKAs were on an upward trend on steady demand despite news that the government had not finalized plans for its own carbon border tax.

UKAs were trading at GBP46/mtCO2e at 1144 GMT Nov. 24, Intercontinental Exchange data showed. Prices have recovered steadily after they fell to all-time lows of GBP33.50/mtCO2e in mid-September. Platts assessed UKAs at GBP45.26/mtCO2e on Nov. 23, the highest since Oct. 18.

S&P Global analysts expect UK carbon prices to hit the low GBP50/mtCO2e mark in December due to a 12.4% reduction in the cap starting from 2024. "We expect an uptick in activity prior to this supply restriction along with a colder-temperature-inspired price surge as the winter sets in. Based on these factors, the outlook is bullish compared to the current market levels," they said in a note.

UK Chancellor Jeremy Hunt did not set forth a UK Carbon Border Adjustment Mechanism and a timetable to implement it by 2026 in the UK Autumn Statement as many market participants had expected.

The statement only confirmed that the government "has undertaken extensive consultation on possible measures to mitigate carbon leakage risk including introducing a carbon border adjustment mechanism and will publish its response shortly," without mentioning a timeline.

A UK CBAM would create a level playing field on carbon pricing, ensuring that imported steel pays the same carbon costs as UK steelmakers, and it is key to prevent carbon leakage.

The EU currently has a CBAM in place, which essentially levies a tax on imports of selected carbon intensive materials and products (including aluminum, cement, electricity, fertilizers, hydrogen, iron and steel) into the EU, removing the gap between the EU Emissions Trading System carbon price and the export country of origin's carbon price.

The main purpose of the tax is to reduce the risk of carbon leakage -- EU industries re locating abroad -- and encourage importer nations to introduce their own carbon markets and, so, limit CBAM impacts on their traded goods.

The mechanism, which is currently in its transitional phase, is to be phased in from 2026 to 2034, in step with the phasing out of free allowances in the EU ETS. Initially, importers will be required to buy certificates for 2.5% of their emissions in 2026, rising to 100% by 2034.