Weak compliance demand drags EU carbon prices to three-month low

Carbon prices under the EU Emissions Trading System fell to three-month low this week due to soft compliance demand and lower interest from the power generation sector.

EU Allowances under the December 2023 contract were trading at Eur86.42/mtCO2e ($95.01/mtCO2e) at 0951 GMT on April 28, compared to a week ago when the contract settled at Eur89.72/mtCO2e on April 21, ICE data showed.

EUAs for December 2023 slumped to a three-month low of Eur85.64/mtCO2e April 26 but recovered to Eur86.73/mtCO2e on April 27, according to data from S&P Global Commodity Insights.

Bearish momentum was gathering pace on the EU carbon complex after a stable start to April.

EU ETS prices have fallen around 10% since early-April and compliance demand has pretty much been exhausted ahead of the April 30 allowances deadline.

Power generation buying interest was also declining amid a fall in gas and power prices, supporting coal to gas switching.

"The bearish fundamental driven demand is tempering upside from financial investor interest in the market, which has slowed in the past week despite Member States in the EU Council approving EU ETS revisions on April 25 – the final approval step before legislative changes can become effective," said S&P Global carbon analyst Michael Evans.

Weak compliance driven demand will support a bearish price outlook into the summer, according to analysts at S&P Global, as growing supply expectations under REPowerEU will temper financial investor interest.

ETS reforms

On April 25, the European Council approved a series of climate reforms as part of the Fit for 55 package, which include an overhaul of the EU's Emissions Trading System, the introduction of a carbon border tax, and the launch of a social climate fund, it said April 25.

That meant those key parts of climate legislation have finally cleared the lawmaking stage and will now be published in the EU Official Journal and enter into force 20 days later.

The move came more than four months after negotiators agreed to reform the EU's ETS, increasing carbon cutting ambitions to 2030, detailing the removal of free allowances and confirming the inclusion of maritime shipping and a new ETS II for buildings and road transport.

Installations covered under the revised ETS will need to reduce carbon emissions by 62% on 2005 levels by 2030, one percentage point more than proposed by the European Commission and a 44% hike on the current target.

Obligations for shipping companies to surrender allowances will be introduced gradually: 40% for verified emissions from 2024, 70% from 2025 and 100% from 2026. Under the amended ETS, free allowances will be phased out from 2026, just as the CBAM will be phased in. The EU ETS II for road transport and buildings will be in place by 2027 -- a year later than proposed by the EC.