The decarbonization of the region’s energy system is occurring at an accelerated pace
This year, the European price of carbon emissions allowances is falling as the region's energy system decarbonizes at a rapid pace, Bloomberg reports .
The price of CO 2 Emission allowances under the EU ETS were around 54 euros/t on 26 February. Although the market is up this week, it is still about 43% lower than it was a year ago.
This trend is surprising to experts, as Europe's emissions trading system will be strengthened in the coming years as the EU works towards achieving zero emissions by 2050.
However, the decarbonization of the region's energy system is advancing rapidly, reducing the demand for carbon credits and thus leading to a fall in prices.
Last year, wind and solar plants generated the largest amount of electricity recorded in the EU, which was accelerated by the energy crisis. Its share was 27% of total generation. Furthermore, the powerful French nuclear fleet has recovered from serious failures, as has hydroelectric power after droughts. The warm winter reduced energy consumption, while wind generation increased during this period.
“Decarbonization in the energy sector is happening faster than the carbon market can keep up,” said Mark Lewis, head of research and portfolio manager at Andurand Capital Management.
CO2 prices also fell in a context of weak demand from industry, as many factories closed following the sharp increase in energy prices in 2022.
According to Lewis, as the emissions market will be much tighter at the end of the decade, it is only a matter of time before prices rise again.
At the same time, according to the Financial Times column, the European emissions trading system is too clunky to provide the necessary impetus for decarbonization. There is currently an oversupply on the market for a good reason: CO2 emissions in the bloc have decreased. According to ICIS, they amounted to 1.2 billion tonnes in 2023, compared to 1.4 billion tonnes in 2022. Furthermore, there are still many allowances available as the EU sells additional lots at auctions to help pay for the energy transition.
Much of the missing CO2 emissions are cyclical rather than structural, notes the FT. Almost half of ETS emissions come from the industrial sector, which suffers from high energy prices. As the European economy gains momentum, emissions are expected to start rising again.
Most of the remaining emissions come from the energy sector, which is on a better trajectory, increasing the share of renewable generation. However, there is also a certain cyclicality here. The decrease in electricity demand (almost 7% in 2021-2023) is the result of an increase in prices in 2022, and the trend is expected to reverse.
All of this leads to a silent trajectory of emissions reduction. CO₂ emissions in 2026-2027 are expected to be approximately the same as they are now. Given the expected reduction in the number of licenses, the market may prove to be restrictive.
As the GMK Center previously reported, the price of carbon emissions in the EU could reach 400 euros/t by 2040, as predicted by financial analysts in October last year. These values can be achieved with an emissions reduction target of 90%.
