Price forecasts for EU emission allowances (EUAs) naturally vary considerably depending on the study and the underlying assumptions. While some analyses only a moderate price increase forecast , others assume significantly higher prices by 2027. In a study from October 2024, forecasts a price of 160Veyt € /t CO₂ in 2027.
A consensus report determined an average expected price of 120€ /t CO₂ in 2027. The estimate is based on a summary of various studies and expert opinions that take into account different scenarios and assumptions.
We at CAP2 are also convinced that the general conditions favor a further increase in prices. We see the following reasons for this in particular.
1. Bringing forward future Auction volumes in 2024
As part of the RE-Power-EU plan, the European Commission decided to some of the emission allowances planned for the years 2027-2030 auction as early as 2024. This was done on the grounds that short-term financing requirements for the energy transition and reducing dependence on fossil fuels. According to official figures, a total of were around 34.7 million EUAs brought forward and placed on the market early. In the short term (2024-2025), the measure will lead to a slight increase in the supply of emission allowances, which could reduce price pressure. In the medium to long term (from 2027 onwards), the early withdrawal will lead to a steeper shortage of available allowances, as the originally planned auction volume be lower in these years will , which will further increase the shortage of available EUAs , which was already intended by the annual cap and market stability reserve from 2027 onwards. Even earlier, the expectation of a shortage is likely to lead to a higher price level.
2. Further shortages through the “Fit for 55” package
The in June 2023 legislative package contains a large number of measures that a that came into force will lead to significant shortage of emission allowances in the coming years.
2.1 Greater reduction in the number of total allowances available (EUA cap reduction)
The annual reduction rate (Linear Reduction Factor, LRF) was from by 2027 increased . 2.2% to 4.and to from 20284.4% per year This means that significantly fewer new emission allowances will come onto the market each year than in the previous year. If efficiency reserves cannot be utilized to the same extent, the scarcity situation of the EUA will worsen significantly more each year than along the original path, while production volumes remain the same. This scenario seems realistic, as it will hardly be possible to achieve the same level of efficiency reserves across all production processes.
2.2 One-off reduction of the EUA offer
In addition to the increase in the annual reduction, was additional one-off reduction of 90 million EUAs in 2024 and 27 million EUAs in 2026 agreed. This measure removes a considerable amount of emission allowances from the market in one fell swoop; for 2024, this corresponds to almost 9% of the total number of emission allowances in circulation (TNAC).
2.3 Tightening of the Market Stability Reserve (MSR)
The Market Stability Reserve (MSR) is a mechanism that came into force in 2019 and absorbs of EUA allowances from the market in “surpluses” order to stabilize the price. The surplus was defined by the legislator in a relatively free-handed and largely theory-free manner. A quantity of 400 to 833 million emission allowances in circulation (TNAC) was defined as appropriate. If there are more than 833 million but less than 1096 million EUAs in circulation, all excess of 833 million are now EUAs in included in the MSR[4] . If there are more than 1096 million EUAs in circulation, 12% of the quantity in excess of 833 million should actually have been placed in the MSR again from 2024. To date, 24% of the have been surplus allowances transferred to the MSR each year. This regulation has been extended until 2030, meaning that the higher level of 24% will remain in place for the time being.
The maximum number of EUAs that can be held in the MSR 55″. All pollution rights in excess of this will be deleted forever. Whereas previously there was a dynamic upper limit based on the has also been tightened by “fit for previous year’s auction volume, there is now an additional absolute limit of 400 million. The although dynamic threshold remains in place, it now only applies if the MSR stock falls below 400 million but is still above the previous year’s auction volume. Based on the 2023 auction volume, which can be calculated at around 475 million EUA based on the EU Commission’s publications, around 75 million EUA less would have been deleted from the MSR without this additional fixed threshold.
2.3 Integration of maritime transport into the EU ETS
Since January 1, 2024, shipping has been gradually into the integrated EU Emissions Trading System (EU ETS)[5] . This initially affects large seagoing vessels (over 5000 GT) that travel between EU ports or to/from third countries. The regulation is designed in such a way that full coverage of emissions only will be achieved :by 2026
- 2024: 40 % of emissions CO₂ must be covered by EUAs
be covered - 2025: 70 % of emissions CO₂
- 2026: 100 % of the emissionsCO₂
An additional spent 78.4 million EUAs will be on the additional emissions covered by the ETS. This is likely to be rather low. The figure is based on an estimate using data from the EU Monitoring, Reporting and Verification Regulation (EU MRV), which has been recording CO₂ emissions from ships with a gross tonnage of over 5,000 since 2018. In 2021, the reported emissions from maritime transport amounted to around 124 million tons of CO₂.
The catch here is that the quantity of EUAs for shipping has already been allocated to the market from 2024, although the actual demand from the sector will only fully materialize in the coming years (DEHSt, 2024). In this constellation, short and medium-term effects on the EUA price are to be expected in different directions. In the short term (2024-2025), a could temporary oversupply of allowances slow down or have already slowed down the price increase, as demand from the shipping industry is only gradually picking up. In the medium to long term, due to the full a significant increase in demand can be expected from 2026 integration of maritime transport, while supply will not increase any further. Rising prices would be the result.
3. Increase in demand for energy gas as gas storage facilities
A rebound in industrial activity following economic downturns typically increases the demand for emission allowances. In addition, a rise in gas prices can lead to industries increasingly turning to more carbon-intensive fuels such as coal, which in turn increases the demand for EUAs.
At the same time, however, we currently a structural gas storage problem in Europe. This is also due to the expired transcontract for Russian natural gas, which was previously transported via pipelines in Ukraine. However, low storage levels mean higher gas prices, and higher gas prices lead to more coal-fired power generation have . This requires more EUAs, which should stimulate their prices once again.
4. Reduction of free certificates for the industry
The free allocation of EUA allowances to certain industries (e.g. steel, cement, chemicals) will be gradually abolished from 2026. By 2030, the proportion of free allowances will already have fallen by 48%, and by 2034 by 100%.
Some market observers expect this to result in a further shortage of supply, which would also have a price-increasing effect. We tend to assume that no or only very little price impetus will be released here. As the CAP in the EU ETS and therefore the number of available EUAs will remain the same, only will change the distribution mechanism , not the total quantity.
However, widespread uncertainty about future prices and the associated increased stockpiling of EUA could provide an additional boost to prices. Higher price volatility could be expected , but temporarily not a sustained, structural increase. It remains to be seen whether the newly shuffled cards on the demand side will lead to individual players gaining relevant market power and influencing prices through strategic bidding behavior.
