TDR Energy Analysis: Carbon market outlook for August

Rising carbon prices are no longer a safe bet under current market conditions


25 July 2022

In recent years, the European carbon market has been given a new boost thanks to more ambitious climate targets and fewer allowances in circulation. As a result, carbon prices have been rising rapidly, reaching a record high of €98,49 just ahead of Russia’s assault on Ukraine.

However, the new political and economic challenges prevented the EUAs from rising further. Europe is currently prioritizing energy security over climate targets while carbon breaking the €100 level is no longer a safe bet. The EUAs are predicted to “recover to €85-90 in August” according to an analyst quoted by Carbon Pulse. Still, under current market conditions, it may be difficult for carbon prices to reach that high due to some bearish drivers:

–       Reduced industrial output amid higher power prices as factories across Europe continue to lower or even shut down production in response to rising gas. Typically, low production levels translate into lower carbon emissions.

–       Release additional 250 million allowances from the MSR to generate €20 billion for financing the RePowerEU plan. The decision, if approved, would constitute a dangerous precedent for interfering in the market thus undermining its credibility.

On the other hand, over the next month, EUA prices could be supported by the following bearish factors:

–       Gas to coal shifting generates higher emissions.

–       Summer weather conditions typically include hot temperatures, weaker wind periods, low hydro levels, and stronger demand for air conditioning.

–       Halved auction supply due to August holidays

The carbon market, like any other market, is unpredictable and reliant on many factors. Carbon prices could move either way but we expect the EUAs to continue to follow the situation in the European gas market to which is negatively correlated lately. Furthermore, we predict low trading volumes due to the summer holidays, which could increase market volatility.