Bloomberg reported a surprising trend in the European carbon market, where the price of CO2 emission allowances has fallen as the region accelerates its decarbonization efforts.
On February 26, the price stood at approximately €54 per ton, marking a significant decrease of 43% compared to the previous year.
This unexpected decline comes despite expectations of a strengthened emissions trading system (ETS) in Europe as part of the EU’s ambitious goal to achieve carbon neutrality by 2050. However, the rapid decarbonization of the energy sector has led to a decrease in demand for carbon credits, driving prices down.
Factors contributing to this trend include record-high electricity generation from wind and solar power plants in the EU last year, accounting for 27% of total generation.
Additionally, France’s nuclear fleet recovered from setbacks, and hydropower rebounded after periods of drought. A warm winter further reduced energy consumption while wind generation surged.
Mark Lewis, head of research at Andurand Capital Management, notes that the pace of decarbonization in the power sector is outstripping the carbon market’s ability to adjust, resulting in falling prices. Weak demand from industry, spurred by plant closures amid high energy prices in 2022, has also contributed to the decline.
Despite the current oversupply of allowances in the market, analysts predict that prices will eventually rebound as the emissions market tightens towards the end of the decade.
However, critics argue that the European emissions trading system lacks the agility needed to drive decarbonization effectively. While emissions in the bloc have decreased, there remains an oversupply of allowances, partly due to the EU’s auctioning of additional lots to fund the energy transition.
The Financial Times pointed out that much of the reduction in CO2 emissions is cyclical rather than structural, with emissions expected to rise again as the European economy gains momentum. This cyclical nature extends to the power sector, where declines in electricity demand are expected to reverse.
Overall, while the current trajectory suggests a muted reduction in emissions in the coming years, analysts anticipate a tightening of the market as permit numbers decrease, potentially leading to higher carbon prices in the future.
Financial analysts have predicted that carbon prices in the EU could reach €400 per ton by 2040, assuming a target range of 90% emission reductions.