Eua Prices

In commodity markets, the spot price of CO2 EUAs is extremely volatile, with daily variations in the price of emissions allowances fundamentally continent on the balance of supply and demand. While the European Commission, which oversees the EU ETS at the highest level, ultimately dictates the supply of EUAs on carbon markets by administering cap allowances between phases, demand conditions are relative to each EU ETS-compliant organisation and contingent on a plethora of diverse factors. For instance, economic buoyancy may induce a propensity to accelerate productive output, supporting a greater prerequisite for carbon allowances thusly. Conversely, companies adopting energy-efficient and low-emissions practices, by way of using alternative fuels, reduces the need for allowances. Meanwhile, traded commodities, such as EUAs, are sensitive to the decision-making process: When, for example, environmental legislation is up for change, carbon markets anticipate how said changes may influence their respective operations, whereby a rumour mill can have a destabilising effect on prices as the market loses or gains confidence and hedges its bets accordingly.

The financial crisis and ensuing recession saw a colossal over-supply of carbon allowances build up as pan-European industrial output tumbled, permanently depressing prices until a recent upsurge: The average spot price of EUAs fell by 42.8% and 38.6% in 2012 and 2013 respectively, troughing at €4.59/tCO2 on average in the latter year. An imbalance between supply and demand endured in the succeeding years, exemplified by an over-supply of 1.7 billion tonnes worth of EUAs at year-end December 2016, compared with emissions from installations covered by the EU ETS of 1.75 billion tonnes: Expressly, carbon market inventory equated to almost 100% of annual demand. As the cost of EUAs remained low - the average spot price of EUAs did not inflate above €7.95/tCO2 on average between and inclusive of 2012 and 2017 - the incentive to emit less CO2 or invest significant amounts of capital in green technologies faded as traditional practices more associated with pollution could be offset on the cheap.

However, in 2018, heralded indicative and sharp inflation in the spot price of EUAs, which rose by an astonishing 171.1% to €15.65/tCO2 on average during the year, predominantly contributing to expected compound annual growth in prices of 59.4% over the five-year period through 2021. A recent upsurge in prices is in large part attributable to carbon emitting organisations ramping up hedging ahead of supply cuts which came into effect from January 2019, and as more speculative traders entered the carbon market. Initially proposed in 2014 and with the legislative process being finalised by the European Parliament in October 2015, the so-called Market Stability Reserve (MSR) for the EU ETS was activated in January 2019 to address the surplus of EUAs built up post-financial crisis. In effect, the MSR is a central bank for carbon that aims to remove surplus inventory at a rate of 24% per year between 2019 and 2023, and at a rate of 12% year-on-year thereafter. Amid carbon market reform and a potentially monumental squeeze on EUA supply in consequence, prices are expected to continue to rally as EU ETS participants adjust to the newly-imposed MSR.

In 2020, the average spot price of EUAs only rose by 1.6%, to reach €25.03/tCO2. This is a result of the many complications which arose from the global spread of COVID-19 (coronavirus). The coronavirus outbreak led to the disruption to supply chains, currency markets, stock markets, commodity markets, consumer demand and business activity, which have combined to result in a global economic slowdown. With regards to EUA prices, these only rose by a minimal amount, as the pandemic reduced aviation demand, industrial demand and power market demand. For instance, global flight volumes fell notably from March 2020 onwards in 2020, with the UK recently cancelling auction for EUA Aviation allowances. Similarly, factory closures across the global due to coronavirus restrictions have reduced demand for metals and cement due to reduced manufacturing and construction activity. Finally, the coronavirus led to reduced power demand, reducing permit demand from coal and gas generators. As a result, the average spot price of EUAs increased significantly by 59.4% to €39.90/tCO2 in 2021.

In 2022, EU carbon permit prices crashed after the Russian-Ukraine crisis. In February 2022, President Vladimir Putin announced that Russia was initiating a "special military operation" in the Donbas region, and proceeded to launch a full-scale invasion into Ukraine. Prices fell to €60 per tonne in March 2022, with stakeholders pulling out of the market, despite rising energy prices. The price decrease was due to an expected ban on Russian energy in Europe as part of sanctions implemented by Western governments.