Europe’s carbon price perfect storm

CARBON: The price of European ETS carbon permits has been plunging. As the global carbon pricing standard-bearer sees a perfect storm of weak demand and higher supply. Demand is crimped by Europe’ industrial recession, mild weather, lower natgas prices, higher renewables capacity, with only a small boost from now including the maritime industry. Whilst the EU’s 244 million of fundraising permit auctions is a supply overhang. This is setback to decarbonisation incentives and adds to the sector gloom from Tesla (TSLA (NASDAQ:TSLA)) to renewables stocks (ICLN). Yet, most of these overhangs are cyclical. And a regulatory squeeze on supply-demand is coming.

ETS: Europe’s cap-and-trade system covers an est. 40% of EU emissions and is expanding, ultimately putting a floor under ETS prices. With the EU’s ‘fit for 55’ plan passed last June, to cut emissions 55% versus 1990 levels by 2030. Includes 1) cutting supply by raising the annual cap decrease to 2.2% and phasing out free allowances by 2034. 2) Boosting demand by adding shipping to the ETS this year, and buildings and transport in 2027. 3) Introduce tighter permit caps for electricity and aviation. 4) Phase in a EU carbon border levy from 2026, that effectively globalizes the ETS market given Europe’s role as the largest export market for 80 countries.

GLOBAL: Near quarter of global CO2 emissions are now covered by carbon pricing initiatives, in 39 countries, according to the World Bank. China’s scheme, introduced in 2021, is the world’s largest and covers near 10% all global emissions. The EU scheme is the 2nd largest, covering over 4% of global emissions, and most traded ($800 billion last year). It’s been running since 2005, making it the oldest. Its ETS remains well above other markets, like in California and UK, that are also included in the KRBN global carbon ETF. Europe’s ETS generated an estimated $42 billion of revenue in 2023, that is returned to governments to invest in climate measures.