Bearish EU carbon prices to continue in 2024 on lower power emissions, oversupply

The European Union's carbon prices are expected to continue their bearish trend into 2024 on projected lower emissions from the dominant power sector, tepid gas prices and oversupply issues, according to market sources.

Throughout the volatile price movements of 2023, the EUA market witnessed record highs and multi-month lows. Platts, part of S&P Global Commodity Insights, last assessed the price of an EUA at Eur 80/mtCO2e on Dec. 27. This was the first time since Oct. 24 that EU Allowance prices have reached EUR 80, data from S&P Global Commodity Insights shows.

2024 price outlook

S&P Global's EU carbon prices forecast for 2024 remains relatively restrained, with an anticipation of a premium over the current price amid modest economics and industrial demand recovery.

S&P Global forecast the EU carbon price in a range of Eur80.8-95.50/mtCO2e across 2024, with an average of Eur89.60/mtCO2e. The forecast was revised down on Dec. 20 from the previous forecast average of Eur93.5/mtCO2e published in November.

"A slowdown in the European economy can lead to reduced industrial activity which has been the case for much of this year," Michael Testa, an analyst at S&P Global, said. "This reduction in production would decrease the demand for carbon credits, leading to lower prices."

"While there may be mild improvements later in the year, the overall recovery remains tentative and subject to various economic pressures," Testa added.

Tim Atkinson from London-based CFP Energy said it was difficult to see where bullish fundamentals will kick in.

"Short of a prolonged weather snap, I wouldn't be surprised to see a Eur65-75 range through early 2024," Atkinson said.

Meanwhile, a London-based source said it would be surprising if the price drops below Eur60/mtCO2e.

"I'm trying to find an argument to be bullish next year because you look at the price levels and you're like, well, surely it's a buy," the source said.

Supply and demand

In 2024, 684 million EUAs and EU Aviation Allowances, or EUAAs, will be auctioned, about 161 million EUAs more than the 523 million auctioned in 2023, according to EEX. Of the 2024 total, 677 million will be EUAs and 6.7 million will be EUAAs.

However, the published number assumed no reduction from the Market Stability Reserve.

"The total number published in the calendar is not a very representative number as it assumes no auction reduction ... which we would see in the range of 76 million,"Stefan Feuchtinger, head of market research and analysis at Vertis Environmental Finance, said. "Hence, we would expect the actual 2024 auction volume to be around 608 million next year. As expected, this is more than last year, but we would see this within the range of what the market expected."

Higher renewable energy capacity in key European economies and lower power emissions are expected to tame demand for EUAs in 2024.

The potential inclusion of maritime transport within the EU emissions trading system may not exert a substantial influence on prices, as the sector's demand accounts for merely approximately 40 million mt in 2024, according to CFP Energy.

"Across the whole [shipping] sector, the forecast demand is about 35-40 million mtCO2e in 2024, rising to 80-100 million mtCO2e by 2026, so the sector alone is unlikely to have a material impact on the EUA price," Atkinson said.

EU gas demand

The correlation between EUAs and the Dutch TTF natural gas price also remains a dominant factor for the carbon market.

A second UK-based carbon trader said that when there is no market news on the day, the carbon market tracks the TTF price.

"We are bearish on TTF because the fundamental picture for next year is also bearish," the carbon trader said. "So unless we have a supply shock, or the weather pattern changes."

EUA prices volatile in 2023

In February, the Platts EUA price soared to Eur100.23/mtCO2e, the highest level since Platts started the assessment in December 2012.

The upward momentum in February was primarily attributed to the agreement of the Fit-for-55 ETS reform package, as well as the acceleration of hedging activities during January following a period of notably low volumes after the peak of the energy crisis in 2022, Feuchtinger said alongside Vertis Environmental Finance analyst Gabriel Morchoven.

Thereafter, market remained above the Eur80/mtCO2e level for nearly 10 months despite the bearish fundamental landscape.

However, by December, the price broke below Eur80/mtCO2e and plunged significantly by about 33% from the February peak to Eur66.79/mtCO2e, the lowest level since October 2022.

The market's weakness stemmed from a combination of bearish factors, including weak industrial output, a drop in power emissions and a shift away from carbon-intensive power generation, and the cost of improvement of solar and wind power.

On the investment front, investment funds significantly increased their short positions in the latter half of the year to a record net-short position of 42 million in December, according to an Intercontinental Exchange Commitment of Traders report.