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Will high European carbon prices last?

Hæge Fjellheim
Hæge Fjellheim
Head of Carbon Research

European carbon prices have surged in a year of unprecedented volatility. As the Market Stability Reserve comes into force, our webinar examined the carbon market outlook in light of the revised rules of the EU Emissions Trading System to meet Europe’s 2030 climate change ambition.


  1. Our recent webinar looked at reasons for the 2018 surge in European carbon prices, and gave an outlook for the market impact of the reformed EU Emissions Trading System and forthcoming Market Stability Reserve.

  2. European carbon prices have rallied since the beginning of 2018, up from €8/t in January to peak at €25/t in September with big price volatilities.

  3. Going from 2019 until 2030, we forecast that EUA prices will average €23/t, with prices on average €24/t over the next five years.


Before considering the carbon market outlook up until 2030, let’s first take a step back and put a bumper year for European carbon into perspective.

At their highest, European carbon prices peaked at almost €30/t in 2008, and subsequently crashed on the realization that the market was heavily oversupplied due to the financial crisis and the inflow of carbon credits from outside of the EU, reaching a low of under €3/t in 2013.

As in other markets, the price is a function of supply and demand, but the EU ETS is far more influenced by politics, since it is basically a political instrument used to achieve climate change ambitions. The demand side fluctuates with economic activity and emissions in the sectors covered by the scheme, while the supply side is fixed upfront to ensure predictability for European industry.

In reaction to the market imbalance, policy discussions amongst EU regulatory bodies took place in order to ensure that the EU ETS could live up to its aspiration as the Union’s flagship climate instrument, with a dual aim to ensure that emissions targets were met and provide the right signal to trigger low-carbon investments.

Carbon price development since 2008. Will high European carbon prices last?

From a slow recovery pathway during the policy processes to strengthen the system, the market once again experienced a drastic price decline in early 2016 and following the Brexit referendum before slowly starting to recover in early 2017.

Prices started in mid-2017 from a modest base and have since been going up aside from a few bearish glitches along the way.

The December European Union Allowances (EUA) contract has nearly tripled in one year and European carbon prices have rallied relentlessly since the beginning of 2018, aside from a slight decline in October, originally trading at €8/t in January, prices peaked at €25/t in September.

Watch the webinar: A new era for European carbon or calmer waters ahead?

The Market Stability Reserve

We see the anticipation of the start of the Market Stability Reserve (MSR) from 1 January, 2019 as the main factor behind the bullish development primarily driving the EUA price rally.

The MSR introduces supply-side flexibility and will hold back 24 percent of the surplus in the market over its first five years of operation, curbing auction volumes by 40 percent.

Hæge Fjellheim quote. Will high European carbon prices last?

A price reaction was expected as European policymakers agreed on the rules for the fourth trading period of the carbon market at the end of 2017 – in particular in light of the agreement to double the pace of the intake to the MSR.

However, the sheer price increase over such a short period of time far exceeded our expectations.

Originally forecast to reach €8/t in 2018, average prices for 2018 are set to at least double for the year.

The year also marked the re-entering of financials into the EU ETS to further accelerate the price rise, as has an observed front-running of utilities forward EUA hedging. In addition to this big appetite for EUAs, an overall bullish energy complex with a tight European gas market has lent further support to carbon.

How will the MSR work? Get access to timely reports for carbon trading and pricing in Eikon

Carbon Price Forecast 2019-2030

Going forward, in the period 2019 until 2030, we forecast that EUA prices will average €23/t, with prices on average €24/t over the next five years when the MSR works at double the speed with the market eying the annual supply crunch, triggering more abatement.

Annual EUA price forecast 2019-30. Will high European carbon prices last?

We are forecasting a gradual price decline from 2022 until 2027 due to two factors.

This declining price path reflects the dual effect of the MSR intake being halved to 12 percent from 2024 onwards, coupled with declining emissions due to an increased phase-in of renewable energy for power generation in line with Europe’s 2030 renewables ambition.

As a result, we estimate that the market surplus will be on the rise again after 2023.

In anticipation of higher abatement needs in industrial sectors moving towards 2030, we forecast prices to pick up in the final years of Phase 4 of the EU ETS, ending at approximately €26/t.

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Watch the webinar: A new era for European carbon or calmer waters ahead? Will high European carbon prices last?