European Carbon Market Update – Expectations vs Reality

We view the recent EUA rally above €80/tonne as overdone, with speculative market participants effectively jumping the gun on looming market deficits with industrial consumers likely to remain short-sighted in Cal-25 - industrial buying required to underpin a sustained carbon rally is unlikely to materialise this year with balances comfortable. We subsequently view the early-2025 rally as something of a false start before actual forced buying in the 2026 and 2027 short years contributes towards a more sustainable higher price level for EUAs , which will ultimately be based on the price of marginal industrial abatement. As such, we see current long accumulation as vulnerable, instead expecting to see positioning swing in-line with broader market dynamics, particularly in the European gas market. Going forward, the target price level for dip buying will ultimately act as a floor for the market. In 2024 this progressively moved higher from €50/tonne in Feb-24 to €60/tonne over H2-24. Although we don’t expect to see industrials buying at current levels, we think the upcoming shortages as free allocation is slashed from 2026, coupled with the aggression of the rally in Jan-25 will see this level increase, with a shift towards a € 70 being deemed good value , and subsequently setting the floor. We now expect EUAs to average €73/tonne in 2025, and €82.5/tonne in 2026.