Price drivers
European Union Allowances (EUAs) are financial instruments, and their prices, like those of other assets, are shaped by market events and forces. EUAs do not live in an isolated bubble. Carbon price movements can be explained based on different factors. Just like for other assets, the price of EUAs is determined by the laws of demand and supply.
On the supply side, things are relatively stable and foreseeable - the supply of EUAs is regulated and often planned several years in advance. There is a gradual decrease built into the system to ensure long-term price appreciation and reflect the urgency of the need for climate change mitigation.
On the EU ETS demand side, a multitude of factors enter into play: energy marketsand notably gas and coal prices, the macroeconomic environment and industrial output, weather conditions which influence energy consumption, technological developments which impact the cost of decarbonation. EUAs are impacted differently by those parameters, which can induce short or medium term volatility.
European carbon allowances are set for sustained price appreciation over the long term, driven by their decreasing supply. However, ever changing short- and medium-term factors induce price volatility. Prices can fluctuate within wide ranges over a short period of time, depending on the combination of drivers mentioned above.
