CRU forecasts that the EUA price will be stable at ~€84 /tCO₂ over the next four weeks, the result of several offsetting developments.
On the one hand, elevated gas prices will support gas-to-coal shifting, lifting EUA demand from power generators. On the other, deteriorating industrial profitability and falling output will suppress EUA demand from the industrial sector.
Moreover, policy will have a neutral effect on the carbon price over the coming weeks. Recent decisions by the European Parliament to support EU ETS revisions have boosted investor confidence in the EUA price, but the EUA price cap scheme still under discussion is muting future price expectations.
Gas supply loss to prompt higher coal consumption in July…
Russian gas supply to Europe dropped by half between May and June, resulting in a steady increase of gas prices from mid-June and CRU expects further gas-to-coal shifting will lift EUA demand by ~2%. This will support the EUA price in July.
…but weak industrial demand reduces EUA price pressure
European industrial demand continued to weaken in June. As a result, European steel and aluminium prices have declined by 8% and 4% respectively over recent weeks. We expect European industrial production to continue to fall over the coming weeks as profitability deteriorates.
Neutral policy impact on EUA price
As expected, the European Parliament’s vote on 22 June in favour of EU ETS revisions lifted the EUA price and further support from the Council of European Union added to upward pressure. In addition, the potential for no additional constraints on EUA market access boosted confidence in EUA prices in the last week of June.
This positive price pressure was offset by news that the Environment Council of the European Union and the European Parliament are currently debating the use of price control measures, such as the release of additional EUA supply from the Market Stability Reserve (MSR).
We do not expect such measures will come into force before October, even if approved, as negotiations on the detail will take several months. Also, the current six-month average price of €83 /tCO₂ is below the suggested trigger threshold of 2.5–3.0x the mean price in 2020–2021, equivalent to €100–120 /tCO₂.
Overall, we expect policy to have a broadly neutral impact on EUA prices in the next month.
The cut-off date of the data is 3 July 2022.
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