European carbon allowance prices have recovered from the lows of October 2022, driven by a combination of factors:
- EU announcement of plans to curb free allowances and introduce the Carbon Border Adjustment Mechanism (CBAM), which will require non-EU countries to buy CBAM certificates to trade across borders with EU countries from October 2023
- Low wind and cold weather forecasts across the next few weeks leading to higher thermal power expectations
- An April deadline for companies to purchase certificates to cover their emissions for the previous year before the market reforms begin.
The rise in EU carbon prices has raised concerns from industry players, particularly in hard-to-decarbonise industries such as steel manufacturing. Carbon abatement technology for these industries is in its infancy and, combined with high gas prices, high carbon prices could lead to further offshoring of industrial demand outside of Europe.
Looking further forward, high carbon prices will also increase the cost of generating blue hydrogen – perhaps tilting investment more towards green hydrogen solutions.