Carbon at Year End: EUR 100/t or EUR 50/t? | Yehor Melakh, ClearBlue Markets

Good morning everyone, thank you for having me here, it's a pleasure to be here in Amsterdam. My name is Yehor, I'm a senior carbon market analyst at ClearBlue Markets, we cover carbon markets all across the world, compliance, voluntary, I myself focus on European carbon markets, what influences it, what the impact, what to expect, anything related to that. As you see on my screen, the title is carbon at the year end, 100 or 50, the difference between those two translates into around 20 euro per megawatt hour for a gas plant, even more for coal and lignite plant, so tracking carbon prices is very important as it adds additional power price demand and any other influences. There was already a lot of discussions on geopolitics, gas, how they all impact, a lot of turbulence already going on there, similar pictures actually as well in EUTS for European carbon markets, there's a lot of turbulence there, a lot of volatility, a lot of changes. As you see here is a revamp of the past two years, how the price has been developing. As you see in January 2026 the price peaked at around 92 euros, market participants were anticipating short year ahead, meaning that demand would be exceeding significantly, the supply coming to the markets as a result in anticipation of that there was a lot of build out of investment funds that draw the prices as well. However, since then, already in January and it evolved further in February, there was a lot of political turbulence, many European officials, particularly Chancellor Merkel, President Macron, they mentioned that ETS must be revised, the price at the level it is right now is way too high. It's not justified, Macron called for levels such as 30-40 euros, there was a lot of negative sentiment, as you see, within a few months after that, the prices crashed quite some, dropping by more than 30%, it bottomed at 63 euros, but since then it started slightly rebounding. Why there is such a discussion around it, yes, it's very important to understand. First of all, this year there is a review around it, coming from the Commission, discussing later with Parliament and Council, they are discussing what could be the future changes of the EU carbon markets, how it should be evolving in the future. And given the current context of new energy crisis wave, as European Union, as it was already mentioned before, depends highly on fossils, it can't really change much quickly. So, typically, the fossil share, fossil development, thus, they are trying to look where they can impact, so that to ease the shock, the negative impact for power producers, for industrials, that's why the easy target right now is the carbon markets. There are two sides right now that view the carbon markets. On the one hand, there are more ambitious countries, normally, usually, there is a lot of Nordic countries, Spain and other countries, they are saying that we have another energy crisis in European Union. What it means, it means that we rely heavily on other fossil fuels, what we need, is we need to increase ambitions in carbon, decarbonize our continent even more, so that in the future we prevent any further energy crisis that we keep having, so that we don't depend anymore, we become more autonomous. On the other hand, there are other countries that are saying that carbon market, carbon price, impact already, even more on top of the current energy crisis, so at least what we can do is to remove this carbon burden, carbon pressure from power, from industrials, to save them. And right now, because of that, there is this clash, completely opposite view on the future of the carbon markets, how it should be tackled, and that's what we're following, that's what we'll explain more. There will be a conclusion to that, somewhat in the Q1, Q2, 2027, there will be developed one common stance on the future of it. I'll go into details in a bit. But to mention else, the important drivers is German power, it correlates well with EUAs, especially last year, the correlation is pretty strong with Dutch TTF, it's lower now, but also notable. And another is that investment funds used to be quite a big impact on EUAs, however, since mid-July it diverged, quite few. Moving on to the next slide, here, as I mentioned, there is this review of carbon markets going on. On July 17, European Commission came out with their proposal, how they view the changes to the markets should be done. There are the four main aspects of it, of course, there is much more details to that. I rather focused on the biggest changes. First of all is the cap trajectory, and the way carbon markets work, is that there is a limited amount of allowances that can be given out. Every year, it reduces as a certain linear reduction rate. So, the faster linear reduction factor, the less allowances are there in the market, and thus higher the prices. That's why European Commission proposed to lower the reduction factor, so that there are more allowances staying in the market, meaning more emissions can occur, and thus less price. They suggested to lower it from 4.4% to 3.7%, and even lowering further from 2036 to 1.7%. Another additionalities that they are trying to give is more flexibility given to the market. They are offering to allow a certain amount of international carbon credits, so the projects that can be done outside of the European Union to remove emissions. On top of that, European Commission offers to increase the amount of allowances to be given to the market by introducing carbon removals. Around 250 million tons of carbon removals could also be entered into the market. Carbon removals is the one that will be just capturing emissions straight from the air, thus allowing more emissions to happen here on the ground. On top of that, there is also other important factors like free allocation. Many industrials are continuing to receive their allowances, their right to emit for free, thus they want to extend it. This way they try to balance the dilemma that I mentioned before, that some countries are citing increased problems, increased exposure to industrials. So thus they are trying to help, ok, industrials will be receiving more free allowances, while trying to preserve still green ambitions to decarbonize further. And lastly, there is an investment booster, they suggest that this is a direct help for industrials. As most of the countries cite the effect on industrials, they are aiming to give direct help that can be granted only if they will deliver actual decarbonization, if they will actually reduce the emission from industrials. A lot of the investment boosters is aiming at carbon capture, but also at electrification plants, so on top of that it would also increase electricity demand from industrials further. Moving on, here you can see a quick comparison, here we combined all the additional changes that happened to the market, so more allowances that entered to help industrials. On top of that, all the previous things that I mentioned, as you see, Crap Trajectory adds a bearish sentiment to the market, investment booster as well as it brings more allowances to the market. Overall, their whole aim of course is to make it less painful for the industrials. Again, given the current context of additional energy crisis, it accelerates the stocks even more. Where we stand right now? As I mentioned, Commission just proposed the changes, it is not a law yet, they will have yet to come up with a common ground. It is two separate additional bodies, European Parliament and European Council. European Parliament, their European committee, they are discussing the common stance of the Parliament, similarly Council, but for Council what is different is for the Council common ground, they need 15 states to agree with it, with a combined population of 65%. While for Parliament, the simple majority is enough. After they agree, each one of them with their position, they are moving on to a trialogue where together with European Commission, they will finalise the final view of the ETS review for the future. To summarise the positions, as I mentioned, they are going differently, later they will have to conclude with something together. Parliament already has their draft proposed, how they view the changes, they are quite close with European Commission proposal, giving the meaning that there might be more collaboration and not so many compromises needed in future. They are saying that they want even less ambitious linear reduction factors, so 3.4 and 2.3 after 2036, it would add 60 million more allowances eligible in the market. But what is even more interesting is that Peter Lise, the reporter from EPP, the biggest party, he suggested to amend one of the mechanisms in the ETS. That mechanism right now, it controls the price spikes, the way it's triggered. If the previous six months average exceeds 2-year average by 2.4 times, then 75 million of allowances are released to the market. He wants to make it more responsive to the market. He wants this mechanism to trigger once the three months average exceeds 25% of the preceding 12 months, releasing 25 million of allowances. This way it creates, let's say, a soft corridor, so every time prices jump too high or fall too low, there will be always more or less rebalancing. However, this creates the issue of the fact that some speculators might leave the market, lowering liquidity, and that's something what European Commission is very strongly opposed. However, many of the concerns come from the spikes and it needs to be tackled. So, if this is not agreed, maybe something else will be offered to still tackle the problem of high price volatility and price spikes. On the council, the picture is much more complicated. This is 27 ministers from 27 countries. Right now, there are two different states. Six countries are suggesting even further ambitiousness on decarbonization, which will result into higher EUA prices. On the other hand, ten countries led by Poland and Italy, they are saying, we want way less ambitious, we need to help industrials. Right now, we can't make it even more ambitious. Poland suggests significant reduction to the ETS, which as a result would lower prices. They will have to, each of the sides, it doesn't have enough yet countries to finalize their view. Germany doesn't have yet the full stance on that. They have the biggest vote impact. Their position will be very impactful. And what is also worth mentioning is ETS 2. It's the, unlike ETS 1, it will focus on emissions from the households and from the road transport. What is important is because last year, it was agreed to be delayed by one year in exchange for maintaining ambitiousness of the carbon markets of the European Union. This year, there is a chance that it again can be used as a sacrifice goal to maintain ambitious of current carbon markets in European Union. Thus delaying even one more year. However, delaying it one more year would further destroy the credibility. Here is the combination. I showed different stance of the parliament, of the parties. As I said, EPP will have to find 361 to form a view. Usually, they were formed in collision with S&D and Renew. However, S&D and Renew have very strong ambitious targets, which clashes with the biggest party understanding of the market. That's why there will be, that's why it creates a lot of tension. And thus, to summarizing my outlook, commission aims to have the common approach by first quarter. But there are still so many unresolved clashes, issues that it might slip into Q1, Q3. But nevertheless, I believe that final outlook for cap trajectory will be somewhere close to what European Commission proposed. So, reducing the current low linear reduction factor. On top of that, adding additionalities and flexibilities like international carbon credits, as well as removals. And the investment booster is something very important, as it adds extra supply to the market, but via direct help to industrials, that are supposed to eventually deliver the decarbonization. Meaning that not only it's more allowances to the market, that adds bearish sentiment to the price, but also potentially in future it would result in less emissions from the industrials, less demand, so affecting price even further. So, the most important date, as I said, is in December. Parliament and Council will have to finally agree with their position. And already in 2027, then they will be able to start their trial, their discussions on how they view all these things. Other important last slide, other important factors happening in the market. This slide answers my first slide where carbon should be ending, 100 or 50. My answer is high 80s. October usually is a shoulder month, less demand. However, there are other important factors. As was mentioned before, El Niño would bring warmer winter, less demand overall. Another bearish factor, but the most important is November 20, when the European Union and the UK will discuss linkages between the two markets, potentially fueling EUAs, as well as shrinking coal fleet. Coal is very incentivized, coal brings more emissions to the market, but there is limitation to that. It's very limited. They are different overall. My answer is high 80s, answering my first slide. Thank you for your attention. If you have any further questions, I'll be happy to answer. Any further clarification? Thank you for your attention. Thank you very much indeed, Yeo. Excellent. Thank you. It was a very good overview of what's happening, the dates to watch out for in the coming weeks, and we'll probably expect some kind of price volatility around that and any announcements or any developments there. Yeo, you say you expect carbon to be in the high 80s by the end of the year. So basically now we're just trading flats, because we're in the high 80s already, right? We're 86. Just today, actually, prices already fell to around 85 euro. Okay. So we expect that to be around that, but October we expect to be more bearish months, but November, December more of a bullish month. December seasonally is a bullish month. And as there is more clarity, certainty coming from council and parliament, what the potential outlook, the final result of the review will look like, the more we're getting closer to it, the more we can say with certainty. Right now, our outlook is that the compromise between them will be close to European Commission. And if that materializes, then it should be in high 80s by the end of the year. And Q1 next year? Q1 next year, even higher. Even higher. So higher 90s? 100 even? Q1, no, but beginning of 90s. In the 90s, yeah. Because for those of you who read Montel News, we had a story this morning where some of your colleagues, some analysts at other organizations said, predicted 100 euros for carbon by next year due to tightness in the markets. Is there political appetite for carbon prices at 100 euros a ton? That's the thing. Last year, it was much easier to just price in all the fundamentals that are in the market and forecast price higher than 100. But as I showed in the first picture, together with current energy crisis, European politicians, they're the only way to help industrials to keep up, to cope with this energy crisis. The only way they can offer them is some relief, at least with the carbon. That's why it's now much harder to price, predict much higher forecasts, because now everyone more or less understand on the market that once it's getting too painful, climbs too high, officials will just step in. They won't be able to do the changes right now, but their announcement will be enough already to lower the price, which they will later try to translate into lower price with policy as well. So what do you think would trigger those kind of announcements? Would it be 100 euros over 100 euros potentially? Well, as I mentioned in January, at this level, at 90s, it was already triggered. But I think also politicians had more conversation with policymakers, with European Commission. They understand that they can't just say they're the one that's 30, 40 euros. They slightly changed their view. So exceeding 100 euros would trigger from them quite certainly. Absolutely. We'll certainly be watching it very closely. Do you fear that there's a kind of a divide in Europe between those who are very strong defenders of the ETS and those who either want it massively reformed, watered down or even suspended? Yeah, political environment right now is very divided. As I mentioned, there are countries that saying we have energy crisis, let's remove carbon costs at least to help industrials. As I said, it's already keep happening to Europe. Second, many times we can't keep depending on fossils. We need to remove dependence from fossils and carbon markets is our tool for that. So we need more ambitiousness. It's absolutely polar views on that. But on top of that, there is other political concerns coming from upcoming elections. For example, in France, elections coming up, right, far right parties there are strongly against carbon markets. That's why current governments also don't want to give tools for the upcoming elections for their opponents to just win more votes by saying, look, all our problems come from carbon markets. We'll come in power. We'll scrap it. It's going to be all fine. So they need to maintain the price not too painful for citizens, not to feel it too much so that they can survive new elections and perhaps after that make more long term plans. Absolutely. It's a very, very political market. Right now. It always has been. Any questions for Yehor? If there are none, please give him a warm round of applause. Thank you. Thank you very much, Yehor. Thank you. There's a little present from us. Thank you. And we will now take a break. So please return here in 30 minutes.