Higher volumes of emission allowances in auctions push down the price and reduce expected returns

Emission allowance prices are a topic not only for European households and industry, but also for politicians. It is precisely the revenues from the auctions of additional allowances for the financing of the RePowerEU program that are burdened with uncertainty due to the volatile development of prices. While in the last two years the price of the allowance reached 100 euros, this year it has fallen by almost half. In particular, the additional volumes of allowances in recent months push their prices down.

Emission allowance prices are relatively volatile this year, similar to natural gas prices. At the turn of the year, they still reached around EUR 80/t, then they started to fall, and even the recent attempt to recover prices did not last long. According to the Montel server, prices in auctions on the primary market this year are on average around EUR 59/t. At the same time, the European Commission expected an average price of EUR 75/t.

“Legislators are keeping a close eye on the lower-than-expected yields. I would say they’re in a wait-and-see mode for now, watching to see if prices recover,” LSEG analyst Yan Qin said according to the server.

The additional volumes of allowances that are used to finance the RePowerEU program will nevertheless be compensated by a reduction in the volume of auctions towards the end of the current decade. This will ensure that no additional volumes of emission allowances are released into circulation for the entire trading period.

Stronger supply and weaker demand

Although volume will be unchanged over the decade, currently stronger auctions are pushing the price down. On the contrary, towards the end of the decade, a stronger upward pressure on allowance prices can be expected due to the lower supply. During this year and next, according to Matteo Melotti of the Italian consulting company Fedabo, they could increase the volume of auctions by a total of 87 million tons. At the same time, 16 million tons were released last year.

The increase in auction volumes also comes at a time when demand for emission allowances is relatively weak. European industrial production has still not recovered to pre-crisis values. Similarly, the interest of fossil resource operators, who are struggling with lower demand for electricity and competition in the form of low-emission sources, which are gradually pushing them out of the market, is also weakening.