Europe's carbon footprint defies expectations

Over the past couple of weeks EU carbon prices have dropped 17%, from almost €95 per tonne in mid-December to around €76-€78 per tonne currently.

The decline accelerated as the price broke through a number of key technical indicators: first the 23 and 30 day exponential moving averages, followed by the 200 day moving average.

As I highlighted in Return to the 70's, published in late October, €76-€78 was a key support level during the period Jan-Feb 2022, and then again from mid-March through to the end of August. EUA prices broke through this level during November only to retest it again a couple weeks later, before then surging towards €95 per tonne in mid-December.

Concern over ongoing maintenance at France’s nuclear facilities, coupled with the prospect of a cold snap and low wind generation in early December meant many market participants were concerned about increased demand for natural gas and higher thermal coal power generation (see Gone is the wind: How the winter doldrums, wind "droughts", and "global stilling" affect power generation and the demand for carbon).

A return to this level marks a remarkable turnaround for the EU carbon market given the geopolitical turmoil, EU carbon policy uncertainty, and the macroeconomic hit wrought by high and volatile energy prices. Over the past twelve months EU carbon prices are right back to where they started 2022.

Focusing on the demand side (i.e. the demand for carbon allowances), perhaps the most surprising fact is that despite expectations at the beginning of the year, and especially in the aftermath of Russia’s invasion of Ukraine, EU carbon emissions in 2022 are likely to be down on 2021.

Lets look at some of the key factors that affected demand for carbon allowances during 2022, and what it might mean for 2023.

Warm, often wet, and a bit windy

Instead of a bitterly cold winter, we (at least in Europe) got something more akin to spring. Record high temperatures for the time of year have even left much of the Alps bereft of snow. A harbinger of a warmer climate to come perhaps, but for this winter at least, the warmer weather was welcomed.