Higher emissions allowance volumes at auctions push prices down and reduce expected revenues

Emissions allowance prices are a concern not only for European households and industry, but also for politicians. Revenues from auctions of additional allowances to finance the RePowerEU programme are subject to uncertainty due to volatile price movements. While allowance prices approached 100 euros in the last two years, this year they have fallen to almost half that level. In particular, the additional allowance volumes in recent months have been pushing prices down.

Emissions allowance prices have been relatively volatile this year, much like natural gas prices. At the turn of the year, they were still around 80 EUR/t, but then began to fall, and a recent attempt at a recovery did not last long. According to Montel, prices at primary-market auctions have averaged around 59 EUR/t this year. The European Commission had assumed an average price of 75 EUR/t.

"Lawmakers are closely monitoring revenues that are lower than originally expected. I would say they are in wait-and-see mode for now, watching to see whether prices recover," LSEG analyst Yan Qin said, according to the website.

The additional allowance volumes used to finance the RePowerEU programme will, however, be offset by a reduction in auction volumes towards the end of the current decade. This will ensure that no additional emissions allowances are released into circulation over the entire trading period.

Stronger supply and weaker demand

Although the volume will remain unchanged over the decade, stronger auctions are currently pushing prices down. Conversely, stronger upward pressure on allowance prices can be expected towards the end of the decade due to lower supply. According to Matteo Melotti of Italian consultancy Fedabo, auction volumes could increase by a total of 87 million tonnes this year and next. A further 16 million tonnes were already released last year.

The increase in auction volumes is also coming at a time when demand for emissions allowances is relatively weak. European industrial production has still not recovered to pre-crisis levels. Interest is also waning among operators of fossil-fuel power plants, which are grappling with lower electricity demand and competition from low-emissions sources that are gradually pushing them out of the market.