Emissions under EU ETS plummet in 2023 on renewables boost

Regulated CO2 emissions from power plants and factories under the EU Emissions Trading System in 2023 fell 15.5% from 2022, the steepest decline since this compliance carbon market was established in 2005, the European Commission said.

The plunge in emissions was due to a substantial increase in renewable electricity production led by wind and solar, at the expense of both coal and gas as the bloc's power sector has made significant strides to decarbonize its operations.

"The most important driver for the record decrease in EU ETS emissions has been the power sector, with emissions from electricity production having decreased by an impressive 24% compared to 2022," the EC said in a statement.

EU ETS emissions are now around 47% below 2005 levels and well on track to achieve the 2030 target of a reduction of 62%, according to these provisional estimates.

Industrial emissions fall

Emissions from the industry sector were down 7% from 2022 mainly due to reduced output and efficiency gains, which are mainly visible in cement, iron and steel.

That has come with the EU facing macroeconomic headwinds due to high inflation, weak manufacturing data and weak industrial output.

But emissions from the aviation sector were up around 10% as this industry has continued to recover after the coronavirus pandemic.

Several traders and analysts were estimating a drop of around 10%-15% in 2023 verified emissions.

Stefan Feuchtinger, head of market research and analysis at Vertis Environmental Finance, said 2023 emissions were mostly in line with market expectations with the fall reiterating the deep emission reductions in the EU ETS, which was another bearish sign for EU Allowances.

"We believe industry has not really recovered but at least stabilized its production levels. This draws a rather dire picture for EUAs over the next few months," Feuchtinger said.

"A recovery of EUAs therefore seems to hinge upon log-term oriented funds and traders to take long positions at the lows we are currently seeing. While there will be certainly a bit of that, think it will not be sustainable for the mid-term if power demand remains so sluggish again this year and industrial demand does not recover."

Analysts at S&P Global Commodity Insights had forecast 2023 EU ETS stationary emissions to total 1.123 billion mtCO2e, down 11% from 1.267 billion mtCO2e in 2022, and 17% lower than in 2020 during the 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."

Carbon price slump

The fall has seen an ongoing slump in carbon prices, with EU Allowances under the ETS halving in the space of a year.

EUAs hit a record high of over Eur100/mtCO2e in February 2023 but by late February this year were at a 34-month low, just above the Eur50/mt ($54/mt) mark.

Prices have recovered slightly since then on opportunistic short-term demand, but fundamentals remain largely bearish.

EUAs were trading at Eur58.40/mtCO2e at 1210 GMT on April 4, up 2% from the previous settlement, ICE data showed.

Platts, part of S&P Global Commodity Insights, assessed EUA contracts for December delivery at Eur57.41/mtCO2e April 3.