European Union (EU) carbon prices have undergone a notable downturn, hitting a new 22-month low at €61.40/t, as reported in Veyt’s carbon market note from Henry Lush, Analyst EU Carbon. This decline brings the market to levels not seen since the Russian invasion of Ukraine approximately two years ago. Lush’s technical analysis signals the potential for further decreases if prices fall below these recent lows. The market sentiment appears bearish, with investment fund positions reflecting an increase in short positions by speculators. Notably, carbon prices closely align with movements in the gas market, which has also reached a two-year low, showing no signs of a reversal despite persistent geopolitical risks in the Red Sea.
Several contributing factors to this decline include mild weather and a surge in renewable energy generation, leading to a decrease in demand for fossil fuel power generation and subsequent emissions. The leaked EU Commission Communication on Industrial Carbon Management, highlighted in Veyt’s note, underscores the significance of the European Union Emission Trading System (EU ETS) as the regulatory backbone of the bloc’s abatement strategy. However, it lacks clarity on the integration of removals, with the final document anticipated to be released on February 6.
Member states are currently establishing positions on the suggested 90-95% carbon reduction target proposed by the European Scientific Advisory Board on Climate Change, as outlined in the EU Commission’s 2040 climate target communication. Veyt’s note indicates that Polish support for the target has surprised observers, while Hungarian reticence was anticipated. The outlined ambition in EU climate law is expected to exert influence on carbon prices within the EU ETS.
In a significant development, Tata Steel has announced the closure of two blast furnaces at the Port Talbot location, as noted in Veyt’s market report. Simultaneously, the company is investing in greener electric arc furnaces. Both European and UK industries are grappling with energy crises and a challenging macroeconomic outlook, resulting in reduced demand for EUAs and UKAs. Notably, the Tata Steel Port Talbot location emitted 5,673,654 tonnes of CO2 in 2022 and received 5,768,835 UKAs in free allocation.
Overall, insights from Veyt’s carbon market note from Henry Lush provide a comprehensive understanding of the current state of the EU carbon market, shedding light on the various challenges and trends influencing its trajectory.
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