Why did EUA prices fall so much at the end of 2023 and the begining of 2024?

European Union Allowance (EUA) prices were cut in half between March 2023 and the end of February 2024. A recipe for disaster - this sharp decline was caused by a combination of temporary factors that collectively pressured carbon prices downward.

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The REPowerEU Effect

The recent drop in EUA prices can be majorly attributed to the REPowerEU plan, a response to the geopolitical disruptions caused by the war in Ukraine and the subsequent energy crisis. This policy reduces Europe’s dependence on Russian energy sources by accelerating the transition to renewable energy. To finance this plan, the European Commission injected an additional €20 billion worth of carbon allowances into the market. These allowances, expected to be part of future year's caps, were introduced earlier than planned. This early release temporarily increased the volume of EUAs in the market beyond usual levels. As a result, EUA prices faced downward pressure, dropping from over €90 in March 2023 to around €50 by February 2024. These temporarily added volumes were essentially "borrowed from the future" and will be deducted from the supply of future years.

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The energy markets effect

Prices were also falling due to the energy markets dynamics. On one hand, gas prices were at a decline following their peak in August 2022 with the energy shock following the onset of the war in Ukraine. Also, Europe has been enjoying comfortable storage levels, above historical averages. The mild winter reducing the overall energy demand did not help carbon prices either. Finally, the rise in renewable energy output led to a decrease in emissions from coal power production, further lowering the demand for EUAs.

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The industrial activity effect

The decline in industrial activity across Europe exacerbated the fall in EUA prices. The Euro Area Manufacturing PMI, an indicator of the activity level of the sector, had been falling, as there has been reduced factory output. Lower industrial activity means fewer emissions and, consequently, a decreased demand for EUAs. Also, major compliance buyers had changed their carbon allowances purchasing strategies due to the financial uncertainties and economic disruptions. This reduction in demand from significant industrial players, coupled with a general economic slowdown, led to the further decreases in EUA prices.

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A recipe for disaster and a short-sighted market

The combination of these factors made market participants focus too much on short-term changes, and overlook the long-term fundamentals of the EU ETS. This short-sightedness caused the sharp drop in prices, from €96 per tonne in March 2023 to as low as €50 by February 2024. However, as the market is already adjusting to these disruptions, there are signs of recovery. Since February 2024, EUA prices have begun to rise again, showing the more balanced view of the market’s long-term dynamics. 

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EUAs have resumed their upward trajectory towards effective decarbonization. With short-sighted market conditions now behind us, EU ETS participants are refocusing on the long-term fundamentals of a market built for price appreciation.

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