Somewhat overshadowed by recent extreme gas & power market volatility, European carbon prices are being driven higher by an accelerating policy momentum behind decarbonisation. While UK carbon prices breached 70 EUR/t back in September, EU carbon prices (EUA ETS) followed this week (capping an impressive 28% rise from the start of the month) as a result of the policy tone set by the incoming German government. This includes a proposed 60 EUR/t floor on ETS prices, accelerating the coal exit to 2030 & gas exit by 2045 and a significant increase in forecast power demand requirements.
While a nearer term coal exit may decrease EUA demand (e.g. as was seen in the UK following the introduction of the carbon price support), broader policy decarbonisation momentum is supporting the carbon price rally. Two key considerations that result from this are:
- Higher carbon prices continue to lift the coal & lignite switching ranges in the near term, supporting power prices
- A quicker transition from coal provides a tailwind to a capacity mechanism in Germany.