European Carbon Market Outlook

After steadily shedding value through H2-23, EUA prices have settled in a loose trading range between €50-70/ tonne through H1-24, averaging €60/ tonne through Q1-24 . Lower prices have been driven by very loose short-term fundamentals, with sharp declines in power sector emissions and the industrial sector yet to emerge as a major emissions short. Oversupply has been exacerbated by additional auction volumes under RePowerEU . Despite the bearish short-term balance, downside has largely been protected with a floor around €50/ tonne , supported by expectations for a much tighter mid-term balance with both compliance entities and speculative market participants active around this level. Indeed, with fundamentals largely in no-man’s land (until the market tightens sufficiently to force industrials to be more active on the buy-side), speculative market participants have been playing an outsized role in price formation – our analysis of positioning data highlights a very strong link with European natural gas prices, with relative movements within the current trading range largely driven by TTF price action. Given our bearish outlook on Sum-24 TTF (we expect the market will need to discount to bring overspill storage into the money to avoid storage congestion across Q3-24, with a current quarterly average forecast at €25/MWh), we expect EUA prices to retest €60/ tonne in the coming months. There is a limited time horizon to express a bearish view, however - the structurally tightening supply side will likely see prices back to €100/ tonne by 2027.