European carbon prices tumble, failing to scale new highs as gas drops

There may be no fresh risks of an escalation in the Ukraine war and in the standoff between the EU and Russia regarding its fossil fuels, but recession fears spilled over to the carbon market. The price of a ton of CO2 equivalent within the EU ETS fell more than 5% after challenging recent record highs.

Prices of European permits for emissions of carbon dioxide and other greenhouse gases were racing last week toward record highs, which were set in February with the surge in fossil fuel demand amid the energy crisis and the anticipation of Russia’s invasion of Ukraine. The surge was reversed today with an all-out drop in stocks and commodities including gas and oil.

Fears of a global recession sent prices of fossil fuels lower, spilling over to the European Union’s Emission Trading System (EU ETS). The benchmark December futures contract tumbled more than 5% on the ICE Endex exchange to just under EUR 87 per ton of CO2 equivalent, compared to the all-time closing high of EUR 96.93 from February 8.

EU is reforming its market for carbon certificates

The decline in carbon prices was helped by a weaker-than-expected auction for the certificates within the EU ETS mechanism. Traders are still focused on the war in Ukraine. There seem to be no immediate threats of an escalation and the EU has not yet reached a consensus on the proposed halt of imports of Russian oil.

If the Kremlin stops delivering natural gas to Europe, the resulting decline in consumption would lower the demand for CO2 permits and increase recession risks

Bloomberg reported that Russia’s Gazprom tried to assure European clients that they can keep paying for its gas through Gazprombank, which converts the funds to rubles, though the European Commission earlier said it is a breach of sanctions. There is still the risk that the Kremlin could block the deliveries of natural gas to Europe.

The ban on shipments of coal scheduled for August 10 still stands. On the upside for CO2 prices, the European Parliament is preparing to vote on a proposal for a carbon market reform, which may lead to the system’s expansion to transportation and the buildings sector.

Investors are pouring money into green energy, carbon market sector

BlackRock’s head of sustainable indexing Manuela Sperandeo said cumulative flows into sustainable exchange-traded products (ETPs) are continuing to grow. It may indicate a rise in interest among investors in green energy as well as in the carbon market.

Markets also priced in Portugal and Spain’s temporary caps on natural gas and coal for power plants. The EU’s push away from Russian fossil fuels is disturbing the supply chain and may result in shortages.

Moreover, European countries are turning to domestic resources such as offshore gas, possibly delaying the energy transition. They are seeking coal, gas and oil from elsewhere, too, which is likely to keep prices elevated and add upward pressure on EU ETS quotations, unless demand significantly weakens with the economic slowdown.