Carbon hit multi-year minimum on flagging coal and gas markets

The European carbon market has followed a steady decline since the start of the year. The European Union Allowance (EUAs)* have seen the price slash 35% of its value from the opening of the year. The EUA was priced at around 80 EUR/T on the 2nd of January and is now hitting the minimum of 51,72 EUR/T on 20 February.

The market seems extremely weak, with prices falling with relative ease as there is just too little buying interest and the sellers remain more aggressive. Despite the RSI index now well into the oversold territory, it is difficult to find short-term price support at the moment, especially if the market falls below 50 euro.

Carbon remains closely correlated to developments in the natural gas and coal market, which are pressured by warmer than normal temperatures and inventories rising to new record highs for the time of year.

Carbon and gas prices are linked by the role carbon plays in driving utility demand away from coal. As gas prices fall, it becomes cheaper in power generation compared with coal, since it emits only around half as much CO2 as coal per MWh of electricity produced (and hence utilities have to cover their production with only half of the EUAs).

Coal has played a key role in powering Europe. In fact, in the last two years when gas prices sky-rocketed after Russia invaded Ukraine, many utilities locked in their generation margins by selling power and buying up coal, along with enough European Allowances to cover the emissions. However, now with gas prices back at two-year lows it is once again at the top of the power industry merit order, and utilities are selling back the coal and EUAs they bought in advance, adding to the pressure on carbon prices.

*EUAs in the context of EU environmental policy relates to carbon emissions and trading. An EUA represents an allowance to emit one ton of carbon dioxide equivalent.