SEB: Falling emissions allowance prices open up an investment opportunity

According to Swedish bank SEB, buying emissions allowances at the current relatively low prices could offer lucrative investment opportunities. Like other energy commodities, emissions allowances have also seen prices fall in recent months and weeks. In the coming years, however, the bank expects allowance prices to rise again as the available volume declines.

The European emissions allowance market has been going through a turbulent period in recent years. While emissions allowance prices were still around 100 EUR/t last February, they have fallen as low as 60 EUR/t this year. Since the start of the year alone, the price of the contract for the nearest December delivery, the most liquid product on the market, has fallen by almost a fifth.

The bank also said, according to Montel, that the stabilisation of allowance prices between 60 and 65 EUR/t is probably linked to the recent decline in gas prices. The price of gas on the Dutch TTF for delivery the following year fell over the past year from more than 77 EUR/MWh last January to around 32 EUR/MWh, a level it reached at the start of this year.

"Every year offers unique opportunities across different asset classes. We believe that one of the great opportunities in 2024, looking back, will be cheap emissions allowances," the bank said.

Several factors could support prices

Following the recent decline, the bank expects prices to rise again, driven by several factors. One is the still-positive margins for coal- and gas-fired power generators for future delivery. This could prompt power plant operators to start hedging their future emissions more actively again by buying allowances on forward markets.

Another factor supporting price growth is the inclusion of the maritime transport sector from this year. This will generate additional demand for allowances, as the sector will not receive any free allowances. Further demand growth could come from industry, thanks to a recovery in production as gas prices fall.

SEB therefore expects allowance prices to rise again over the medium and long term. From 2026 and 2027, the bank says, market fundamentals look “as strong as ever, requiring emissions allowance prices of at least 100 EUR/t or more”.