In 2024, European carbon market saw another year of volatile trading with prices tracking European gas prices’ rollercoaster ride closely. The benchmark EUA contract ended the year at €73/t and averaged only €66.5/t in 2024, down 20% from the previous year’s average of €85/t. This was despite the tightening of the overall EU ETS Cap following the implementation of the EU Fit for 55 package. The major factors leading to the drop in prices are lower gas prices in Europe and unfavorable market fundamentals due to the high auction supply and sustained drop in emissions.
Throughout the last year, European carbon price posted steep losses in the first quarter, falling to as low as €52 in March. It moved in lockstep with European gas prices which fell due to abundant supply and mild weather. Price then began to recover as lower energy prices has led to some rebound in industrial activities, supporting allowance demand. After rising to as high as €80 in May, price fell again due to the drop in power sector emissions driven by rising renewables power generation and coal to gas switching in the power sector. It stayed largely rangebound between €60 to €70 in the second half of the year, before posting €10 gains in the final two weeks supported by the temporary pause in daily auctions.
Power and industry sector emissions are estimated to fall 6% in 2024 year-on-year. Against this background, the auction supply in 2024 was ballooned by 87 Mt due to the frontloading of allowances to finance REPowerEU and the inclusion of maritime sector into EU ETS from 2024. The first compliance deadline for maritime operators will be in September 2025 which created a lag between additional supply and demand, adding to the downward pressure to carbon prices in 2024. The weak market fundamentals is also reflected in the speculators’ holdings of EUA derivatives, which remained in net short territory throughout most of 2024 and represented the bearish view of investors.
Last year was also the first year when EU ETS compliance deadline is moved to end of September instead of end of April as in previous years. But this does not have notable implications on seasonality of prices as a substantial share of EU carbon market participants still stick to the old routine of surrendering allowance by April due to financial reporting schedule.
Looking ahead to 2025, the only thing certain is uncertainty. Gas prices will remain as the most important driver for European carbon prices and the two are expected to remain closely correlated. The first two days in 2025 saw Dutch TTF gas price rose to 14-month high on concerns over supply following the halt of Ukraine transit of Russian flows and cold weather, which pushed carbon price to above €75. The tide then turned, and carbon price softened together with the downward correction in gas prices, with the benchmark EUA Dec-25 contract falling to near €73 as the first auction in 2025 took place on 7 January.
The overall fundamentals improved slightly in 2025 due to the continued decline in allowances as well as the increased coverage of maritime sectors emission, from 40% in 2024 to 70% in 2025. This means that this sector is expected to ramp up its buying of allowances during the year as they get more exposed to the European carbon market. Auction supply in 2025 is still ballooned by the additional volumes to support REPowerEU. But the market stability reserve (MSR) will do its job to absorb surplus and tackle demand-side shocks such as the drop in emissions in 2024. Overall, the volatility in European carbon market will persist, but the outlook of tighter market balances in coming years will likely support prices to rebound in 2025.
