Could EU carbon prices hit EUR 90/t by year-end?

Earlier this week, Europe’s benchmark carbon price climbed by over 1 EUR to reach a seven-month high. Could it continue to rise? 

As companies across the EU rush to meet the EU ETS deadline on the 30th September, investment funds’ increase their net long exposure in EU carbon allowances and lower supply could drive the price of EUAs higher. 

In this episode, Richard speaks to Veyt's Carbon Analyst about why the industry expects a tight carbon market next year, and what impact the reduced allowance thresholds and the introduction of CBAM will have on prices. 

Host: Richard Sverrisson - Editor-in-Chief, Montel News

Contributor: Cem Bektas - Carbon Reporter, Montel News
Guests: Ingvild Sørhus - Manager of EU Carbon Analysis, Veyt

Editor: Bled Maliqi
Producer: Sarah Knowles

Transcript

Richard Sverrisson - Editor-in-Chief, Montel News: 0:05

Hello listeners, and welcome to Plugged In - the Energy News podcast from Montel, where we bring you the latest news, issues and changes happening in the energy sector. Earlier this week, Europe's benchmark carbon price climbed by over one Euro to reach a seven month high. Since April, prices have been largely on an upward trend as companies across the EU rush to meet a crucial deadline. Why are we seeing an increase in carbon prices and what is fueling this confidence boost from funds who are increasing their investments in the market? In this episode, I'll be speaking to Veyt´s Carbon Market Analyst, Ingvild Sørhus. But first, I'm joined by our carbon reporter, Cem Bektaş. Welcome back to the podcast, Cem.

Cem Bektaş - Carbon Reporter, Montel News: 0:48

Thank you, Richard.

Richard Sverrisson - Editor-in-Chief, Montel News: 0:49

So I think I'd like to just start Cem by asking you what, what's really, you know, why have prices moved sort of upwardly since the summer.

Cem Bektaş - Carbon Reporter, Montel News: 0:57

Sure. So since July, the price of the Benchmark Des 25 EUA contract have mostly been stuck in a range between 70 and 73 euro per time. Market participants had pointed to a lack of clear direction, let's say, across the market throughout the summer. However, the Des 25 actually broke out to the range at the beginning of September. Gradually you're working this way. And last week we saw that Des 25 ceded, 77 euro per tonne. While this week it's traded above 78 Euro per tonne. And these are the highest levels recorded since mid February this year.

Richard Sverrisson - Editor-in-Chief, Montel News: 1:31

And what are the reasons for those movements? Cem?

Cem Bektaş - Carbon Reporter, Montel News: 1:34

I think there are two drivers to the recent EUA rally, Richard. One of them is the lubing compliance deadline on the 30th of September. This is a deadline for obliged companies to surrender allowances for last year emissions. And late purchases of carbon allowances to cover verified annual emissions is likely to have supported prices. Another factor is to do speculative investors net long exposure in carbon allowances, which has been steadily increasing since late August. Last week, investment funds increased their net long position to almost 69 million tons, which is the largest net lenght in over four years. I think this bullishness could reflect late compliance by, but also preparation for tighter EVTS market balance next year. Sources also pointed to the upcoming the September options contract on the 24th of September. This may have pushed back Des 25 contract closer to the 80 Euro level as well.

Richard Sverrisson - Editor-in-Chief, Montel News: 2:31

Cem. Perfect. Thank you very much indeed. What are the short and long forecasts for carbon prices? A warm welcome back on the podcast Ingvild. How are you?

Ingvild Sørhus - Manager of EU Carbon Analysis, Veyt: 2:42

Thank you. Great. Even if it's a bit rainy here in Oslo.

Richard Sverrisson - Editor-in-Chief, Montel News: 2:46

Absolutely. We want to move on to and talk about the carbon market, the EU ETS, and there's been quite a lot of activity recently, but let's look at the background here and can you describe for me how prices have moved so far this year and what have been the reasons behind those price movements in the carbon markets?

Ingvild Sørhus - Manager of EU Carbon Analysis, Veyt: 3:05

So prices started trickling up earlier, kind of earlier this year, basically. I mean, it was several factors. One was that we had coal in the mix. We had quite much higher, higher emissions in the power mix, more lignite burns. So already, like in the first three months of, or the first quarter of the year, we had like 10% higher emissions than in the first quarter of 2024. And also, I mean, for quite some time market participants have been, seeing shortage coming up in the EU ETS and everyone was just like talking about, okay, it's, we see this is coming, and it seemed that was also factor a being factored in a bit after a bit slow 2024. So quite an optimistic start to the year. And then we had an election and kind of a new president in the US. And I think with all kind of talk about tariffs and threats about tariffs probably worse than most market participants believed in. Then we saw a bit of a risk off in, in, in the carbon market. And that of course, kind of, because the threat that would hit the European industry hard. What would that kind of, how would that kind of hit, hit emissions as well in the EU ETS? It was a bit kind of a risk. Often we saw after the tariff was announced in the rose garden in in April, that prices crashed to the kind of the low so far this year, and then it recovered slightly, but been trading sideways between 70 and 75 for since May even a narrow, more narrow trading range in July and August. And then, regardless of what kind of drivers they saw, I mean we, it was stuck in this range. We saw lower than power emissions in throughout summer, and we had some bullish news like in the. Or should have been incorporated a bit bullish. For instance, the announcement of the oversupply number or the TAC number in June. But that didn't spark any major prize reaction. So it's been a bit, I would say, dull and just getting in this fight wave very strange over summer, but then market participants were back more action. And then I think this. The breakout of this very kind of narrow or relatively narrow sideways range, that was a strong signal to test the upside. I think March participants were waiting for prices to move outta this range to one of the sites. We had have had like in, in September also, we have had a bit kind of low wind in some instances. We have also have had. Some higher demand at auctions as well. We have compliance deadline coming up, so activity has been quite high. I was gonna say that it has been quite important to break these technical levels. We've also tested, again, 75, but that is holding for now. So now we're yeah, we're on the way to perhaps test new levels around 80 and see kind aware prices now well established.

Richard Sverrisson - Editor-in-Chief, Montel News: 6:14

That's an excellent summary, but I'm just wondering what you think what would happen for the rest of the year, so in 2025, and also give us a peek into 2026 if you can.

Ingvild Sørhus - Manager of EU Carbon Analysis, Veyt: 6:25

I mean for just looking at kind of the fuel complex and the fuel searching prices. Gas is in the money now. It seems to be quite below the eua price level. So in that sense, we don't expect much kind of more coal to be favored in the power mix, which should be maybe a dampening effect on prices kindly hedging demand for power side. We are into a more kind of exciting 2026, especially when it comes to like more kind of carbon fundamental things because supply side is getting tighter. Especially, there are few things that are a bit unknowns yet. We haven't had the publication of the auction calendar where European Commission, added quite the local volumes for 2026 for repower EU.'cause that is monetized or part of the repower EU plan is monetized through the ETS and the target is that. The scale of allowances should raise 20 billion euros. So of course, with prices being underperforming compared to what the European Commission thought when they were cutting volumes to the auction calendar. That's a fact. But now for kind of 2026, they seem to have safeguarded a bit, adding quite a bit more volume to the market, but not all these volumes will hit the market. It'll stop whenever the 20 billion target is met. Then the auction and the volumes to the auctions that are set aside to, for this purpose, they will just stop coming to the market. So that's a risk a bit that we don't know how long these volumes will be part of the EU common auctions in 2026. It's another thing that is a bit maybe coming in from the sideline a bit is, we have the shipping. Shipping sector is included or was included into the EU ETS for the first time in 2024. They have reported their emissions, or at least on the way. They've been a bit slow in reporting. But they only have 40% of compliance for 2024 emissions. So the full shipping cap pretend that it was hundred percent, was added in 2024, but that will be retroactively fitted in 2026 when we know the compliance status. So the auction volume that is in the calendars now will also be adjusted lower because there has been too many allowances coming to the market. In 2020 for shipping. So that's that will be as well. So it's a bit kind of these kind of elements that will all kind of be on everyone's mind for next year.

Richard Sverrisson - Editor-in-Chief, Montel News: 9:02

I think, maybe for those listeners who aren't aware what Repower EU is that's the move, basically the measures put in place to, to encourage green energy investments in, in, in Europe, is it not to, or to fund them, shall we say Ingvild? So if I can pinpoint you, where do you think, you said we'd be testing 80 euros in the coming weeks, maybe in the coming months. What do you think? By December, where will we be and what will all, the, on the supply side that you've just, very elegantly put together. What does that mean for prices or what are your expectations?

Ingvild Sørhus - Manager of EU Carbon Analysis, Veyt: 9:36

So I think we will exceed 80. I think we were more kind of getting closer to 85, 90 towards year end. Looking at how the prices will be, or, the abatement cost is not reflected where the price is at the moment. So I think that will be the main driver for kind of this supply shortage for 2026. It's a bit, we have had it a bit before when the, for instance, the Market Stability Reserve started when you were getting into this or anticipated short years when the marketability reserve started, and then you had also a bit kind of upfront action from participants based on this. But I think it's like a bit kind of messy surprise sites still. It's like this unknown. How much of this repower volume will hit the market a bit. Kind of how much will the shipping sector shipping cap will be retrofitted. These things are based on the side line, and then I think, of course it will be important what happens to, on the emission side of things. We are seeing so far this year like roughly roughly the same power emissions for us in as in 2024. And we see kind of industry, there are some sectors that we'll see a bit recovering, but still for instance, German steel industries is performing quite bad, but on overall we see maybe like a one, one to 2% drop in industry emissions in 2026. But again, then it will also be important, like going forward a bit, what's happening over winter on the power side. We have seen, for instance, this year that it's been very low wind levels compared to normal levels lower hydro levels. So it's a bit kind of this. Focus will also be on the emission free power generation availability in winter as well. And then, for now, it seems like the gas market is quite comfortable that it will be sufficient gas for the winter season, at least, like price wise. Looks like it, but then suddenly if something is happening there, of course kind of carbon prices will not live in a vacuum. It could also be impacted there as well.

Richard Sverrisson - Editor-in-Chief, Montel News: 11:43

So if we have a winter with low wind and very cold temperatures, we've been very lucky in previous years, then we could see, an increase in gas fired burn, potentially even coal, which will then drive emissions up. Is that kind of a summary of what you're saying there? Ingvild?

Ingvild Sørhus - Manager of EU Carbon Analysis, Veyt: 11:59

Yeah. And then it's mean then this few searching levels will be important again. But for now, it seems like the few searching levels are quite comfortably below the price for now at least. But that could of course, easily switch if we run into cold periods or Yeah. Some other, yeah, we'd go our renewals.

Richard Sverrisson - Editor-in-Chief, Montel News: 12:19

But you, so you say you expect power sector emissions to be fairly flat then next year by maybe so year on year and very little change. 25, 26. Yeah. Yeah. But then, and for industry, are you seeing any signs of, an increase in production or recovery at all? In industrial production in Europe?

Ingvild Sørhus - Manager of EU Carbon Analysis, Veyt: 12:40

We do. The steel sector is not performing greatly this year, but there are signs of recovering in some other sectors. We don't necessarily expect to see a big drop in industry emissions. And that's maybe only that for now the kind of the tariffs on the EU, of course the state sector is of course linked to the automotive industry, but. But that may be a, we had maybe worse expectations of the tariffs. So then we see kind of performance have taken or have been so far for industry.

Richard Sverrisson - Editor-in-Chief, Montel News: 13:14

And we had we discussed this in great depth in the last week's episode. The outlook for the steel and that, and the aluminium industries. But and there was a bit of bleakness there, shall we say, but I'd like to ask you more about what's happening in the weeks ahead, Ingvild. And can you tell us a little bit more about the EU ETS compliance deadline on the 30th of September and why that is an important date for EU companies?

Ingvild Sørhus - Manager of EU Carbon Analysis, Veyt: 13:36

It's important because then you need to be in compliance for 2024 emissions. So the compliance deadline is a key moment in, in the EU ETS that was it's the first, or sorry, it's the second time when we have the compliance deadline in the 30th of September. What is more the most, I mean we see bit on the the data that is available so far that it's, it's roughly it's getting close to 80% that is in compliance already, even if it's like some days to go. I think this time around it's a bit interesting because. Shipping sector is the, it's the first year where they are complying with EU ETS. When looking at kind of the verified emissions, that was a avail made available like early April that they were lagging behind on the reporting. We've seen that picked up quite a bit lately on from the shipping sector, which means they probably, or hopefully, will be in compliance as well for by the deadline. But why it's important this year is because I know the compliance from the shipping company will make the basis of how much a cap will be or how much the volumes, auction volumes will be adjusted next year. So that's makes this compliance a bit special this year and it's always, this compliance is always a bit, I would say underlying supportive factor when you're getting up to compliance just because it's not necessarily that there are quite a lot that need to buy be in compliance, but it's this focus that someone might be have to buy last minute to be in compliance. And looking at the latest status of the free allocation for 2025. There are some companies that are relying on the free allocation that is handed out to be in compliance for kind of previous year's emissions. There are some countries that are not yet, has quite a lot of free allocation to to hand out still. They still have some time before compliance, but of course if there are companies that are relying on this free allocation to be on their account before compliance. Then it might be the ones that need to go and top up whatever they need. If that happens. I think it's more kind of this underlying support that there might be someone that is in the market needs to go out and buy last minute. And then we have had, like in the past, we have had some examples of strange things happening up until compliance. For instance, the year when British Steel suddenly had to go out and buy quite or get. UK government to buy on their behalf just before kind of compliance. So there are strange things happening, but we don't expect any kind of major news or something around compliance this year.

Richard Sverrisson - Editor-in-Chief, Montel News: 16:19

But there could be some surprises next week.'cause that's what you are saying as we get close to the deadline potentially anyway. But what's the current situation with the phasing out of the free carbon allowances? In a way, this is where, countries can basically give money to, in effect to certain companies and sectors. What you know. Some countries like Germany according for delay. What's the current status with the phase out of these free carbon allowances?

Ingvild Sørhus - Manager of EU Carbon Analysis, Veyt: 16:46

The phase out or the free allowances? It's coupled with CBAM. So the carbon border adjustment mechanism, so of course kind of importers needs to pay now a or from 2026, they need to pay a carbon price equivalent to what's in the EU ETS. So basically European industries facing, or those that are producing goods outside of Europe should face same carbon cost as companies or kind of industry in Europe to levelise the playing field. So that's. To avoid carbon leakage or kind of to dampen math effect. Looking, going forward you can see how the cap is decreasing by years. Fewer and fewer allowances that will be available to the market. And of course if you look a bit further ahead, you can see even if you would continue with free allocation, it's not much free allocation to hand out. So of course if you want to try to do something with kind of this carbon leakage. Question then you one want to do kind of something with incentive to European industry to speed up the decarbonization for industry, but it's also to to give that incentive outside of your Europe's border as well. But of course, with the phase in of CBAM, that means a phase out of free allowances. And that of course is debate and then you I think it was like a German minister saying this is in a more kind of closed closed session with German industry. So we are not sure if this is like official position of Germany as of now. However, it's no kind of, this is part of the whole kind of, it's in legislation. So it's not, Germany to say that, okay, we'll just prolong this. This is like you decision. But I mean we have, it's a policy discussion going on now for instance, like on the 2040 targets. And of course when EU has agreed on the 2040 target for next year. We also expect a review of the EU ETS directive to make it ready or post 2030. And of course, maybe saying that for instance, Germany or some other countries are eager to take up this discussion again, but it's not something that we won't see. a s starting in 2026, the place, I'll start very gradually from next year, but we don't see it's really an eh. A delay to the phase out reallocation will happen in time for 2026.

Richard Sverrisson - Editor-in-Chief, Montel News: 19:21

It's in, in a sense, you can understand where it's coming from. Industry is struggling, be countries want to help out, tho those kind of companies. But in, in effect, it's all in the legislation. There's not that much room for maneuver here. Is there, unless maybe you take it into the 2030-20 40 discussions. Ingvild, a final question, really. A key indicator of market sentiment or where people think market prices are heading, is the kind of the current status of investment funds, net long exposure and in EU carbon allowances. That kind of gives a signal to some anyway. What's the current status there? Could you say a, give us a, say a few words about that please.

Ingvild Sørhus - Manager of EU Carbon Analysis, Veyt: 20:01

Yeah, so now, I mean we have seen a massive increase in the net long position for investment funds over the last few weeks. So now we are basically the net positions are at levels where we're lost in 2021. So it's. We had a peak in the beginning of the year, and then we had a big kind of sell off as well, when prices were dropping. I think it was also quite a lot of investor that was more kind of risk off with the whole geopolitical nervousness, whether kind of this increase is sustainable or not. I think it came also last year based on this kind of bullish view on like a market view that it's, the realization that it will be shorter and shorter by year, and also eating into this structural oversupply that has been in the market for many years. So of course it's going to be interesting to see now whether this will more stabilize around the current levels or if we'll see of course it suddenly they exit market kind of in big positions then that will have a bearish price impact as well. But I think it's also some that see this now a bit, this shortage building up over, 26, 27, 28. Yeah.

Richard Sverrisson - Editor-in-Chief, Montel News: 21:13

So it is, it's having an impact at the moment. And there is more, maybe more potential that prices will increase rather than decrease. That would be a fair analysis of that situation there Ingvild?

Ingvild Sørhus - Manager of EU Carbon Analysis, Veyt: 21:25

Yeah, I think , it was like market were a bit surprised that, for instance, that the previous or the commitment of traders report. I was coming out 16, sorry, 17th of September, that showed in the week where prices went down, there were still building a new long positions, which I think was a bit, surprised and then that you saw a bit, a price uptick for prices as well. I think. Especially with the big changes, it will be quite a lot of focus on the investment funds position. So every kind of Wednesday when the report is coming out, I think it will be quite just seeing how this is playing out now. Yeah,

Richard Sverrisson - Editor-in-Chief, Montel News: 22:00

Ingvild. Thank you very much indeed for being a guest on the Plugged In - Montel News podcast. Thank you.

Ingvild Sørhus - Manager of EU Carbon Analysis, Veyt: 22:06

It's a pleasure to be here. Thank you.

Richard Sverrisson - Editor-in-Chief, Montel News: 22:08

It's been an excellent and insightful discussion. I hope you agree, listeners, and thank you for tuning in to this episode. Our podcast episodes are released every Friday. For the latest news from Montel, please visit montelnews.com and you can follow us on LinkedIn, Bluesky, and other social media channels. See you next time.