EU carbon prices decline as analysts point to signs of potential rebound

European carbon allowances were up around 2% on March 7, rebounding at the end of a week which saw them reach their lowest year-to-date values amid geopolitical uncertainties that impacted energy and gas prices.

EU Allowances were trading at Eur68.63/mtCO2e ($74.45/mtCO2e) at 1107 GMT March 7, down around 3% from a week earlier, according to Intercontinental Exchange data. Platts, part of S&P Global Commodity Insights, assessed the EUA nearest December 2025 contract at Eur66.90/mtCO2e on March 6.

A carbon trader attributed this uptick to technical levels and low-price targeting.

Sentiment in the carbon market has been influenced by geopolitical events, particularly following the US announcement of a halt military aid to Ukraine. President Donald Trump also addressed Congress, emphasizing tariff commitments, including 25% tariffs on Canada and Mexico, 20% on China, and 25% on the EU.

"The bearishness in the EU ETS market is stemming prevalently from the uncertainty in geopolitical developments," a carbon analyst said. The analyst said that the current market sentiment reflects a potential "watering down" of climate objectives, pointing at a trade-off between climate initiatives and defense spending, particularly after the US ceased aid to Ukraine.

Following Trump's announcement, European Commission President Ursula von der Leyen revealed a plan to invest Eur800 billion in defense for Europe.

"As for [the] short-to-midterm, I see more downward movement," the analyst added. "Trump tariffs should impact general macroeconomic sentiment -- and any sign of progress in reaching a deal in Ukraine will boost this bearish trend. The heating season is also soon coming to an end and TTF will be pricing this in."

Dutch TTF gas front-month prices were down 11% week on week early March 7 after dropping below Eur40/MWh during March 5 trading, a level unseen so far this year, according to data from ICE.

This comes as the European Commission proposed a two-year extension(opens in a new tab) to current gas storage regulations but said it would allow member states flexibility when deciding on measures to refill storage facilities this summer, allowing facilities to be refilled throughout the season "at optimal purchase conditions."

Funds remain bullish but reduce length

Investment funds remained net long EUAs although they reduced length for a third consecutive week, by 16% to net long 42 million EUAs as of Feb. 28, ICE data showed.

A trader told Platts that funds would likely remain net-long in the future, adding that prices for EU allowances may drop to Eur60-65/mtCO2e before going up again as participants begin to purchase for compliance reasons.

"Clients are taking the opportunity of prices below Eur68/mtCO2e to hedge themselves for 2025 emissions," an analyst added. A third analyst told Platts that "funds' net long positions are exacerbating this downward movement and we should see more positions closing as prices dip further into the 60s."

Potential rebound

Other market participants highlighted the possibility of a rebound for European carbon prices in the mid-term.

"We see mid-term rebound factors, such as the strong performance of European stocks despite tariff threats, the [potential] extension of gas storage requirements, and the fact that despite the expansion of right-wing influence and the easing of CBAM and ESG regulations, there are still no policies that fundamentally undermine the EU ETS," a carbon analyst said.

Sources also pointed to interest rates as a driver for energy prices with the European Central Bank this week announcing a quarter-point interest rate cut.

"The idea is that an interest rate cut, especially after a period of high rates to cool down inflation, is a positive signal for the economy in general," said Antonello Zanfardino, a senior carbon analyst at BRS Shipbrokers. "Production goes up, and so do the CO2 emissions of the industrial and manufacturing sector, hence pushing the EUA demand upwards."

S&P Global Commodity Insights analysts expect EUAs to average Eur75.30/mtCO2e in 2025, before climbing to Eur80.5/mtCO2e in 2026, according to a recent market outlook.

UKAs at more than one-month low

Meanwhile, UK carbon prices also dropped with UK Allowances trading at GBP39.60/mtCO2e ($51.15/mtCO2e) at 1102 GMT March 7, down around 8% on the week, according to ICE data. Platts assessed UKAs for December delivery at GBP46.48/mtCO2e March 6, the lowest price since Jan. 27.

This comes amid a lack of strong drivers for UK carbon with a broker saying during the week that prices were testing the GBP40/mtCO2e level.

Funds remained net long for UKAs for another consecutive week, according to data from ICE. Investors decreased length 3% compared to the week before, holding 13.2 million UKAs. Investment firms increased shorts by 5% to 36.2 million from 34.4 million UKAs previously.