Supply uncertainties continue to plague the European Union’s Emissions Trading System as lawmakers funnel revenues back to the carbon market to support decarbonization. Additional supply, combined with record-low emissions, has subdued prices. Next year could see a resurgence in reform activity, and as decisions emerge for the many reviews expected by 2026, this will likely increase price volatility. BloombergNEF expects the carbon price to average €65 per metric ton ($72/t) this year, before more than doubling to €145/t by 2030. Surpassing €175/t could be on the cards in 2035, if policy parameters remain unchanged.
- Price outlook: BNEF still anticipates the price of EU emission allowances (better known as EUAs) will dip to €65/t this year. The price is set to keep climbing over the coming years but the ascent will be slowed by persistent low emissions and abundant permit supply. Across 2021-2030 – the fourth phase of the market – the EUA price is expected to average €93/t, slightly below the €95/t previously estimated (Error! Reference source not found.). Lower prices in the near term see the market play catch up for the remainder of Phase 4 as the higher linear reduction factor starts to bite. If policy parameters stay as they are post-2030, the EUA price could hit €177/t by the middle of the next decade, albeit down from an earlier expectation of €194/t.
- Drivers: Attention has started to turn towards 2026 – the year free allocation for aviation will be removed, industrials covered by the carbon border tariff start to see their free allocation cuts, and the maritime sector is fully phased in. There could also be the potential inclusion of international aviation, the waste sector and carbon removal offsets, and a review of the Market Stability Reserve mechanism will also take place. Until then, growth in renewables capacity is expected to carry on and production levels for Europe’s energy-intensive industries will remain sluggish, weighing on EUA demand.
- Risks: The details of four key policies are still outstanding, which will impact the supply trajectory for the rest of the decade. This includes the final volume of allowances needed for REPowerEU – the plan to diversify from Russian fossil fuels – how the additional maritime units will be canceled, when the additional free allowances for sustainable aviation fuel will come to the market and, finally, the exact phasing of allowances for the Innovation Fund and Modernisation Fund from 2025. The rekindled relationship between EUAs and gas prices will also keep the carbon market sensitive to geopolitical events.
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