In The News - OPIS - European Energy Crunch Support Carbon Prices Despite Economic Woes

A black sea of troubles is menacing Europe's economies, as the continent stares down the barrel of a harsh winter recession amid record-high electricity prices, but Russia's invasion of Ukraine and the consequent energy crunch briefly pushed the cost of emitting carbon for Europe's industrial installations to new highs earlier this month….

Christoph Mueck, manager of the global carbon fund of London-based asset manager Altana Wealth, told OPIS in an interview last week that factors such as the annual summertime cut in EUAs auction supply, reduced nuclear output and low hydro power levels were responsible for the run-up in EUAs. Better nuclear or hydro power availability would ease upward pressure on carbon allowances, he said, but if European countries increase their reliance on coal ahead of winter due to lower natural gas supply, Mueck expects carbon prices to rise in the coming months.

"For the remainder of the year, carbon prices will find support in higher power sector emissions," Mueck said. "This, however, has an economic impact which can lead to potential industrial demand destruction as we have already seen with energy-intensive industries beginning to cut their operations.... In the short run, carbon prices may be affected by industrial output destruction, but the dirtier fuel burn will certainly raise prices in the long-run," Mueck said.

Ahead of the trilogues next month between the EU Parliament, the EU Commission and member states, Mueck expects "volatility to pick up over the coming months," with EUAs "at risk of sharp moves." The trilogue discussion includes proposed measures like the potential additional sale of 20 billion euros' worth of carbon allowances from the MSR that would be used to fund energy transition projects under the REPowerEU package that aims to reduce EU dependency on Russian energy.

"Should this proposal come into effect, this would exert heavy bearish pressure on EUA prices," Mueck said.

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