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COVID-19 Has Turned Europe’s Carbon Market Upside Down

COVID-19 Has Turned Europe’s Carbon Market Upside Down

April 07, 2020



  • In the past couple of weeks, Europe’s carbon price has undergone drastic change and is currently trading between €16 per metric ton and €18 per metric ton.
  • Prices have dropped up to €9 per metric ton—40% since early March when prices were trading at about €24 per metric ton.
  • The current trading levels are roughly two thirds of the level of the high of 2019 of €29 per metric ton.
  • Three drivers of the price collapse:
  • Severely weakening fundamentals: Reduced economic activity, power demand, and aviation demand will lead to lower 2020 emissions across Europe
    .
  • Weakening oil prices brought on by an unprecedented fall in global oil demand at a time when current production is outpacing global storage capacity.
  • Bearish financial markets with increased margin calls are reducing noncompliance capital invested in the ETS.

“This is a perfect storm for Europe’s carbon market, and it may well lead to some challenging questions about its role in Europe’s decarbonization strategy once the COVID-19 crisis has passed.” – Coralie Laurencin, director, IHS Markit

  • The Market Stability Reserve (MSR) could bring the market back into balance in 2021. The MSR removes 24% of excess annually, which amounts to 400 million metric tons this year. Of the newly accumulated excess created by COVID-19 in 2021, the MSR will also remove 24%.
  • Depending on the severity and extent of power demand impacts going forward, the IHS Markit outlook for EU ETS prices ranges from an average of €12.6 per metric during second quarter-fourth quarter 2020 (in the reference case) to as low as a €5 per metric ton average over the same period (stress case).
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