European carbon prices drop to 7-week low as market eyes upcoming policy agenda

European carbon prices reached their lowest levels since late August in the early hours of Oct. 5, with market participants citing the end of compliance, a technical break, and prevailing policy risk.

EU Allowances for the nearest December traded at €82.40/metric tons of CO2 equivalent ($91.87/mtCO2e) at 0750 GMT Oct. 5, down 2.39% compared to Friday's close, according to the Intercontinental Exchange. This was the lowest EUA price since Aug. 19, a seven-week low.

"The compliance bid vanished," said Stefan Kermer, founder of analytics provider Carbon Insights. "Free allocation ran late this year, with roughly a quarter of the 2026 volume still untransferred in late September, so installations had to buy in the market to cover the 2025 surrender."

Companies covered by the EU Emissions Trading System had until the end of September to surrender permits for 2025 emissions, with data from the Union Registry showing a compliance rate of 96.9% as of Oct. 5.

Separately, a status table from Sept. 24 showed that free allocation transfers stood at 344.38 million as of Sept. 24, out of a total of 444.54 million scheduled for distribution for the 2026 period.

"Quite a technical move," said an EUA trader with an energy trading firm, agreeing that the compliance deadline also played a role.

Kermer added that "the chart broke," driving prices lower. "The rising support off the April and August lows sat around €84.5, and Friday went through it."

Allowances for the nearest December were down 1.59% by 1630 London time on Oct. 2, according to Platts, part of S&P Global Energy. This was followed by a bearish Monday open, with the price down a further 0.72% at 0600 am London time.

Speaking on the outlook for October, the trader said he does not anticipate significant moves, barring policy announcements.

"Probably range-trading between here and €87/mtCO2e," he said, adding that €95/mtCO2e is the highest he thinks the market will go this year.

Policy risk remains as EU ETS negotiations continue in Brussels, with key milestones on the horizon, including the Oct. 6 deadline for the environmental parliamentary committee to submit amendments to the European Commission's July proposal.

"Policy is the backdrop," said Stefan Kermer. "Italy and Czechia have tabled a paper for the European Council on 15 and 16 October asking to suspend the reserve intake, about 190 million allowances, which is roughly 39% of a year's auction volume."

EU environment ministers are scheduled to meet for the Environment Council on Oct. 12, where they are expected to discuss the EU ETS review and other climate topics. Following this, the European Council is scheduled to meet on Oct. 15-16.

"We have several significant political meetings coming up that could be potentially bearish," said Jan Ahrens, co-founder at analytics firm Transition Metrics. "Both the EU Economy Council on [Oct. 9] as well as the Environment Council on [Oct. 12] could bring negative news on the EU ETS Reform, and further calls to delay ETS2. All of this supports a rather bearish picture, which we generally expect to remain."

Heads of state previously committed to completing the ETS review by the first quarter of 2027, but market participants have cast doubt on the feasibility of this timeline.