Emissions under EU ETS fall 11% in 2023 on weak macroeconomics: S&P Global

Total CO2 emissions under the EU Emissions Trading System likely slumped to their lowest in several years in 2023 as a weak macroeconomic environment led to constrained industrial activity and power demand destruction, according to estimates by analysts at S&P Global Commodity Insights.

According to the estimates, regulated CO2 emissions from power plants and factories under the EU ETS totaled 1.123 billion mtCO2e last year, down 11% from 1.267 billion mtCO2e in 2022, and 17% lower than in 2020 during the coronavirus pandemic.

"Weak macroeconomics was identified as one of the main drivers besides energy prices for the decline in emissions in 2023," S&P Global analysts said in a recent report. "2023 has been a stagnant year for [EU] gross domestic product growth and a contractionary year for Purchasing Managers' Index and these have resulted in lower overall emissions projections."

Emissions from the power generation sector are expected to see the largest drop-off, estimated to fall by 22% year on year amid high energy prices and lower power demand, while the chemical sector is seen falling by 7%. Aviation is the only sector projected to see an increase in emissions for the year, the report said.

The European Commission is expected to release its EU ETS verified emissions data for 2023 in April.

S&P Global analysts noted the positive correlation between macroeconomic indicators such as GDP growth and PMI with emissions changes.

"This is one of the lower GDP growth years since 2006. But has one of the most significant emissions falls," the report said.

2024 price plunge

The fall comes amid an ongoing price slump for EU carbon prices, with EU Allowances under the ETS halving in the space of a year.

In February 2023, EUAs hit a record high of over Eur100/mtCO2e but by late-February this year they were at a 34-month low, just above the Eur50/mt mark.

Prices have recovered since amid some renewed demand with Platts, part of S&P Global Commodity Insights, assessing EUA contracts for December delivery at Eur60.62/mtCO2e ($66.14/mtCO2e) on March 20.

"Traders are expecting some resilience in prices as compliance entities start taking advantage of the lower prices and buying up allowances along with the notion that EUAs are becoming one of the best investment stories of 2024 when it comes to returns prompting investment funds to hold some long positions eventually," S&P Global analysts said in a recent note.

The analysts expect prices this year to average Eur54.50/mtCO2e compared with Eur85.30/mtCO2e in 2023 and Eur81.50/mtCO2e in 2022. But EUAs are expected to rebound to an average of Eur82/mtCO2e in 2025, according to their latest forecast.