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European Carbon Credit Price Sinks to Multi-Year Low

Feb 22 2024

Carbon credit prices in Europe have fallen to their lowest level since July 2021. European Union Allowance (EUA) futures on ICE closed have been trading around €52 per tonne of CO2 this week, having fallen from over €90/t 12 months ago and by over 30% since the start of the year. The sharp decline signifies a change in a market that was expected by many to continue its post-pandemic trajectory and trend higher throughout the decade.

The voluntary carbon credits market is designed as a mechanism for organisations and businesses, such as energy firms and airlines, to offset their carbon emissions throughout purchasing credits. This market is complementary to regulatory carbon markets, which are mandated by governments to achieve emission reductions. The revenue generated from the voluntary market can then be used to finance projects such as reforestation, renewable energy, and energy efficiency.

In early 2020, EUA futures were trading in a €24-€26/t range. Prices fell to €15/t in the early days of the Covid-19 pandemic, dragged down by the crash in oil prices which had been triggered by the announcement of lockdowns around the world, throughout the rest of the 2020 and 2021 the market enjoyed a relentless rally. By February 2022, prices had been swept high as €94/t on a wave of stricter environmental policies from the public sector and increased commitments to meet climate goals from the private sector. During this time, corporate ESG framework and policies took the spotlight in response to increased public awareness and concern on climate change, leading to a boom in the voluntary carbon credit market.

One of the key reasons for the decline in carbon credits prices has been the fall of energy prices over the past 12 months. The high energy prices, particularly for natural gas from 2021 onwards and for crude oil and coal in 2022, helped drive the upward momentum in carbon credits prices. Increased output from energy companies during this period drove higher demand for credits to offset the impact of higher production rates. While crude oil prices remain in elevated uncertainty due to the risk associated with ongoing attacks in the Red Sea, prices for both natural gas and coal have fallen by around 50% since February 2023. The falling demand has weakened the need for voluntary carbon credit purchases from energy companies, contributing to the downward market.

Connected to the declining demand and prices for energy is the weakness in Europe’s industrial sector. For example, Germany’s manufacturing PMI figure has registered below 50 for every month since July 2022, therefore indicating a contraction in activity each time. Weaker industrial output across the continent undermines the need for industrial companies to purchase carbon offsets due to the lower carbon impact associated with reduced output. There is optimism that the end may be in sight for this manufacturing recession should the European Central Bank lower interest rates later this year.

Going forward, ChAI’s models expect that prices have further to fall before they will recover again. As shown in the monthly average price graph below, ChAI’s forecast currently suggests that prices will fall below €50/t during Q2 and Q3 of this year before beginning a recovery in the final months of the year.

EUA carbon credits price forecast

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