Understanding the EUA price correction

Understanding the EUA price correction

EU carbon prices have been supported by a strong structural bullish narrative in the next years, but recent market turbulence has rapidly challenged this view. As political pressures mount and policies face fresh scrutiny, understanding the new dynamics driving carbon allowances is essential for market participants.

In this episode, Julien Hoarau and Paul Chavy unpack the sudden drop in EU Allowances (EUAs) and explain how a barrage of political headlines, lobbying, and leaked documents have disrupted the market.

The sudden drop: From bullish to bearish

A sharp market correction Historically, the trajectory for EU carbon prices has been structurally bullish, driven by the EU’s ambitious decarbonization targets. However, the market recently witnessed a dramatic shift:

• Price drop: EUAs fell more than 20% from their mid-January highs of over €90/t.

• The Catalyst: A combination of intense political headwinds, heavy industrial lobbying, and leaked documents that introduced significant policy uncertainty.

Flashpoints in the EU ETS review

The upcoming review of the EU Emissions Trading System (ETS) has become a battleground for policy. Julien and Paul dive into the three main reform flashpoints creating friction in the market:

• Free allocation: How allowances are distributed to industries and the ongoing debates over reducing these freebies to accelerate decarbonization.

• The MSR (Market Stability Reserve): The mechanism designed to absorb excess allowances and balance the market, which is now under scrutiny for its future parameters.

• The LRF (Linear Reduction Factor): The rate at which the overall cap on emissions is reduced each year, a critical lever for long-term price expectations.

Market dynamics: Amplifying the volatility

Beyond policy, technical and structural market factors are exacerbating the recent price swings. The episode highlights:

• Unallocated allowances: How the potential release of unallocated EUAs could inject sudden supply into the market, weighing on prices.

• Technical positioning: How the technical positioning of traders are amplifying downward volatility, making the price correction steeper than fundamentals alone might suggest.

Is the structural bull case broken?

With policy uncertainty at a high, market consensus is split. The hosts assess whether the long-term bullish outlook for carbon is permanently damaged, or if this is merely a temporary pause dictated by the current political climate. To help navigate this, they lay out three plausible near-term price scenarios based on upcoming regulatory decisions and market behaviors.

Key takeaways

• EUA prices have corrected sharply, falling over 20% from mid-January highs above €90/t.

• The historically strong bullish narrative has been disrupted by political headlines, lobbying pressure, and leaked policy documents.

• The EU ETS review faces three critical flashpoints: Free allocation rules, the MSR, and the LRF.

• Market volatility is being amplified by technical factors, including unallocated allowances and speculators’ dynamics.

• The current downturn may be a political pause rather than a total breakdown of the structural bull case, with three distinct price scenarios expected in the near term.

Conclusion

The narrative surrounding EU carbon prices is shifting towards more complex political and regulatory maneuvering. While the structural push for a greener Europe remains, the pathway there is highly susceptible to lobbying and policy reviews.

For market participants, tracking the EU ETS review developments—specifically around the free allocations, MSR and LRF—and monitoring speculator’s positioning will be crucial for anticipating the next major price movement. The structural bull case may not be broken, but politics are undeniably in the driver’s seat for now.