EU ETS prices under pressure but colder weather could boost demand

European carbon prices fell in the week ending Jan. 5 due to soft demand but with colder weather forecast for the coming days, analysts and traders are expecting a slight recovery.

Platts, part of S&P Global Commodity Insights, assessed EUA contracts for December delivery at Eur75.82/mtCO2e on Jan. 4, falling back from a one-month high of Eur80.37/mtCO2e on Dec. 29.

Demand for EUAs was in the doldrums in December, but traders are expecting some resilience this month.

This comes despite an expected increase in supply of allowances in 2024, with the maritime sector now included in the EU ETS.

The shipping sector's inclusion is projected to add emissions of 90 million mtCO2e this year and 86 million mtCO2e in 2025, according to estimates from S&P Global.

But with EU auctions only expected to start on Jan. 15, supply for this month is set to be very tight, which should provide some support to prices.

"EUAs are expected to rise due to supply constraints and higher winter heat demand," S&P Global analysts said.

EU ETS prices will average Eur80.8/mtCO2e in January, compared to a 2024 average of Eur89.6/mtcO2e, they said. EUAs averaged Eur85.27/mtCO2e in 2023, S&P Global data showed.

German emissions

However, the bearish macroeconomic environment is likely to put pressure on the energy complex.

Germany's annual CO2 emissions are estimated to have fallen 10% year on year to around 673 million mtCO2e in 2023, the lowest since the 1950s, think-tank Agora Energiewende said Jan. 4 in a report.

The projected decline of around 73 million mtCO2e would put Germany back on track towards its 2030 climate target, but was largely due to a weak economy with only 15% of the decline due to long-term measures, Agora said based on preliminary calculations

Power sector emissions are estimated to be down by 21% to 177 million mtCO2e with falling demand, the swing from net exports to imports and rising wind power among other drivers.

But despite the fall in emissions, revenues from Germany's auctioning of carbon allowances under European and national trading schemes hit a record-high Eur18 billion ($19.7 billion) in 2023, up 40% year on year, federal environment agency UBA said Jan. 4.

Revenues under the EU Emissions Trading System rose 12% on the year to Eur7.7 billion, while revenues under the national emissions trading scheme, or nETS, jumped 67% on the year to Eur10.7 billion.

"CO2 pricing through emissions trading is a crucial lever for achieving legal climate targets," UBA President Dirk Messner said. "In Germany, over 85% of emissions are already covered by emissions trading."

Germany auctioned 92 million EUAs in 2023 on European Energy Exchange (EEX), up 8% from 2022.