The European carbon market is expected to experience a notable increase in supply this month, but experts are divided on whether this will exert downward pressure on prices, potentially pushing them back towards the range of EUR 30-35 per tonne. Trevor Sikorski from Energy Aspects predicts that the benchmark contract will likely test the lower band of the range due to the regular stream of allowances entering the market. In January, supply was constrained, resulting in prices briefly surpassing EUR 35 per tonne but failing to sustain those levels.
The EEX exchange plans to sell 60 million allowances in February, a significant increase from the fewer than 3 million sold in January. This rise in supply could create selling pressure, but Tom Lord of Redshaw Advisors believes that pent-up demand will provide support to prices. Lord suggests that UK utilities may be using the EU Emissions Trading System (ETS) to hedge forward power production, even though the UK has withdrawn from the EU and does not have an operational domestic trading scheme.
Factors such as the need to replenish depleted gas inventories and limited hedging opportunities for coal- and gas-fired generators may influence carbon prices. Weaker profit margins for these generators and the growing presence of renewable energy in the market could potentially affect the trajectory of carbon prices.
While the ongoing COVID-19 pandemic has had a slight impact on the market, analysts note that increased household heating demand has partially offset reduced industrial energy consumption. The current lockdown measures are not as severe as those implemented in the initial response to the crisis, which significantly affected industrial activity.
Overall, the reintroduction of the primary market and the changing dynamics of supply and demand will shape the future trajectory of carbon prices in the European market.
