Bank of America Predicts European Carbon Prices May Surpass €100 Per Tonne This Winter

European carbon prices are projected to climb to €100 (USD 112.12) per metric tonne this winter, driven by elevated natural gas prices stemming from geopolitical tensions, particularly the ongoing conflict involving Iran. This surge marks a significant shift in the carbon market, with the demand for carbon allowances expected to spike as power generators increasingly rely on coal, due to its cost-effectiveness compared to natural gas—despite the latter’s carbon costs. Recent analyses highlight that oil prices have surged approximately 40% since late February, a direct consequence of the energy supply crisis triggered by Russia’s invasion of Ukraine.

The driving factors behind this market movement include high natural gas prices, which have lowered the viability of gas as a fuel source, thereby increasing coal usage among European power generators. Additionally, the EU’s Carbon Border Adjustment Mechanism (CBAM) may further tighten the supply of emissions allowances, as it imposes costs on imports based on carbon emissions. However, the decline in coal-generation capacity in Europe may limit the degree of fuel switching, posing a risk to achieving emissions reduction goals even as coal becomes a short-term solution amid the energy crisis.

In the short term, traders and investors should prepare for volatile trading conditions as carbon prices approach the €100 mark. The current upward trajectory of carbon prices could lure interest from investors looking to capitalize on the heightened demand for EUAs. Nevertheless, it’s crucial to adopt a long-term perspective, as forecasts indicate potential price declines to below €80 (USD 89.70) per metric tonne by late 2027 as global oil demand is expected to rebound and new natural gas projects come online, ultimately changing the dynamics within the carbon market.

Source: Market Source

(Expert Note: This report was independently prepared by the Wealthova Commodities team.)