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EU ETS: carbon emissions allowances hits year-to-date lows
EUAs have been trending lower for much of this year. Weaker demand, increased renewables and the front loading of allowances has seen the market trade down to its lowest levels this year
(see also additional information below)
In November, EU Allowances (EUAs) traded down towards EUR75/t, the lowest levels seen this year. And this is after the market briefly broke above EUR100/t at the start of the year. By function, the longer-term outlook for EUAs remains constructive as allowances in the market are reduced. However, shorter-term dynamics are also important. In the current environment, it is probably no surprise that demand for allowances has been lower. The EU has seen reduced industrial activity, which means lower emissions and the need for installations to surrender fewer allowances. Eurostat data shows that emissions in the second quarter of this year fell 5.3% year-on-year to 821mt CO2 equivalent – the lowest levels since the third quarter of 2020. Emissions over the first half of this year totalled 1.76b tonnes CO2eq, down 4.2% year-on-year.
Supply dynamics have also played a role in pressuring EUAs, dimming the short to medium outlook. This is partly due to REPowerEU, which aims to end the EU’s reliance on Russian fossil fuels by diversifying energy sources, energy savings and accelerating the roll-out of renewables.
Ambitious targets under Fit for 55 mean a more aggressive reduction factor will be used for allowances moving forward. A reduction factor of 4.3% per year will be used between 2024 and 2027 and 4.4% between 2028 and 2030. This compares to a previous linear reduction factor of 2.2%. In doing so, the Commission hopes to see emissions under the ETS fall 62% from 2005 levels by 2030 compared to a 43% reduction target previously.
Furthermore, to help hit the target there will be two one-off reductions in the cap, effectively reducing it by 90m allowances in 2024 and a further 27m allowances in 2026.
1 October 2023 saw the start of the trial period for the Carbon Border Adjustment Mechanism (CBAM), where importers of goods in the scope of CBAM have to report the embedded emissions within those imports. CBAM will initially apply to cement, iron and steel, aluminium, fertilisers, electricity and hydrogen.
Then, from 1 January 2026, not only will importers need to declare the quantity of goods imported into the EU in the preceding year and their embedded emissions, but they will also need to surrender the corresponding number of CBAM certificates which is linked to the EU ETS price. The phasing-out of free allocations of EU ETS allowances for these sectors in the EU will take place in parallel with the phasing-in of CBAM in 2026-2034.
Some complementary data
Evolution of emissions allowances since January 2020
Sources: think.ing.com, ember-climate.org
