Europe is no longer in control of its destiny

What a ceasefire in Ukraine means for the EU carbon market

Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭

If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 5,000 people who already read Carbon Risk. Check out the Carbon Risk backstory and find out what other subscribers are saying.

You can also follow on LinkedIn, Bluesky, and Notes. The Carbon Risk referral program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents [Start here].

Thanks for reading Carbon Risk and sharing my work! 🔥

---

Estimated reading time ~ 10 mins

Photo by Max Kukurudziak on Unsplash

Almost three years ago, on 24th February 2022, Russia invaded Ukraine.

The immediate period after the attack was one of the most tumultuous in the history of the EU carbon market. The EU carbon price fell by over 40% within days to below €60 per tonne CO2 as market participants digested the immediate financial and economic impact, and questioned the longer-term political and social implications of the invasion.

Not one to shy away from volatility, the carbon market has continued to whipsaw over the subsequent three years as Europe’s policymakers, its industrial base, and its citizens responded to the conflict, and in particular, to surging energy price-induced inflation. Rather than weaken in the face of these threats, EU climate policy and its carbon market have emerged stronger, yet at the same time, increasingly fragile as political and social divergences have taken hold across Europe (see Collateral damage revisited).

As the outbreak of war sparked fear and uncertainty, peace is also likely to have a cross to bear. The details of any future deal that ultimately ends the war in Ukraine - whether between Trump and Putin, or involving Ukraine and Europe - are clouded by a thick veil of uncertainty. In the absence of any special insight, lets start by assigning a probability to the outcome, and then ask what the knock-on impact is likely to be.

To do that we look to prediction markets. The

Polymarket

contract for ‘Trump ends Ukraine war in first 90 days?’ is currently trading at 39%. For this to settle at 100% “An armistice, ceasefire, or negotiated settlement” involving an “official announcement from both Ukraine and Russia”, would have to be made by 19th April 2025. If that seems too soon, two other Polymarket contracts suggest the implied probability of a ceasefire before July is 64%, rising to 74% by the end of 2025.¹

Europe’s economic response to peace is blunted by the scars of war

Goldman Sachs has scoped out the potential economic implications of the peace based on two scenarios: the first being a more limited truce followed by slow resolution towards lasting peace, and the second, based on a “comprehensive and credible” agreement to end the conflict.

Their analysis focuses on five main factors: lower energy prices, a bounce in consumer confidence, increased construction activity, loss of labour as refugees move back home, and looser financial conditions. Overall, GS analysis indicates a “potential Euro area GDP increase of 0.2% in a limited ceasefire scenario and a 0.5% boost in an upside scenario.” Given that the IMF is only pencilling in 1% GDP growth for 2025, even a mere 0.2% would be a welcome boost.²