Carbon allowances hit four-month lows: speculators fear rules being relaxed

After carbon allowance prices climbed to more than 92 EUR per tonne in mid-January, the trend reversed. In recent weeks, the situation has turned around and carbon allowances have seen a sharp drop. One of the main drivers is uncertainty over a possible easing of the EU Emissions Trading System (EU ETS). The decline has also been driven by recent threats from US President Donald Trump to impose trade tariffs amid the situation surrounding Greenland.

Carbon allowances have long been a subject of debate, especially because of their impact on the competitiveness of European industry and on household budgets. Since last summer, carbon allowance prices had been rising steadily, before once again exceeding 90 EUR/t at the start of this year. Allowances last traded at such high prices in 2023, when they briefly even reached 100 EUR/t.

In recent weeks, however, prices have fallen significantly, by as much as 15% compared with January’s highs. While in the second half of January the market responded with a decline to the US president’s threats to impose higher trade tariffs on several European countries supporting Denmark in its dispute with the US over Greenland, in recent days it has come under further pressure. This is due to speculation and expectations surrounding a possible easing of EU ETS rules.

One of the changes could also involve adjusting the allocation of free allowances to industry, according to S&P Global. Under current rules, free allocations should be phased out by 2034. However, recent unconfirmed reports suggested that an extension of this deadline was being considered. These speculations were later dismissed by Kurt Vandenberghe, Director-General of the Directorate-General for Climate Action.

Industrial competitiveness in the spotlight

Even so, the market remains on edge, as the European Commission is expected to present proposals for reforming the EU ETS this year. Voices are increasingly being raised across EU member states over the competitiveness of European industry. This issue is expected to be a central topic of discussion at an informal meeting of European leaders, which is due to take place today.

The decline in prices was also driven by increased activity from investment funds speculating on carbon allowance prices. Recent concerns about a possible price drop for the reasons outlined above triggered waves of selling among speculators. By the end of January, investment funds had reduced their net long position to around 100 million tonnes. In the final week of January alone, funds cut this position by more than 10%.