Shipping: Navigating the EU ETS Market Challenge

The shipping industry inclusion in the EU ETS market is a game changer for its operations moving forward. In its latest weekly report, shipbroker Intermodal said that “throughout 2023, the EU ETS market navigated through a year of remarkable volatility, observing both record highs and extended lows against the backdrop of evolving energy strategies, policy reforms, and global economic shifts. The average EU carbon price stood at €85.27/mt, momentarily peaking over €100/mt in February to set an unprecedented high. Although prices receded from these heights, they remained notably stable for the majority of the year. This stability is attributed to significant policy advancements within the EU’s ETS, particularly the Fit for 55 initiative’s comprehensive reform legislation. Yet, Q4 saw a decline in carbon prices, impacted by diminished industrial activity and lower gas prices that encouraged fuel switching”.

Source: Intermodal

According to Intermodal’s Research Analyst, Ms. Chara Georgousi, “as 2024 unfolds, the EUA market has experienced an extension of the bearish trend initiated in late 2023. This decline stems from several factors, notably the surge in renewable power generation which undercut the demand for fossil fuel-based permits, and a general contraction in industrial demand attributed to macroeconomic pressures. Remarkably, on February 19th, the benchmark Dec 24 EUA contract plummeted to €53.54/mt, marking the lowest level since June 2021.

This represents a 29.51% decrease since the start of the year and a substantial 46.64% decline from its peak in February 2023. EUA prices have closely followed the trajectory of natural gas prices, which fell to an 8-month low, significantly influencing the direction of the carbon market. On the same day, the front-year TTF natural gas prices have extended their downward momentum, decreasing by 66.37% from their 2023 peak to €24.6/MWh, amidst mild weather and ample storage levels. This alignment highlights the sensitivity of EUA prices to fluctuations in energy markets, particularly natural gas, due to its pivotal role in the EU’s energy mix and its influence on carbon emissions levels”.

Source: Intermodal

Ms. Georgousi added that “market participants have consequently adjusted their 2024 EUA price forecasts downward, now projecting an average of €70.55/mt. This revision accounts for the anticipated sluggish economic growth across Europe, which is expected to further erode demand across numerous industrial sectors within the EU ETS. This forecast is well below the averages of €85.27/mt and €80.65/mt recorded in 2023 and 2022, respectively. Despite this short-term pessimism, there’s a unified expectation for a market rebound from 2026, with prices poised to break the €100/mt barrier. In this context, SEB Bank highlighted, in a February 7 note, the downturn as an opportune moment for investing in EUAs. Citing factors such as a likely uptick in utility hedging, and emergent demand from the shipping industry now encompassed by the EU ETS, SEB Bank anticipates these elements could serve as catalysts to reverse the current downtrend in carbon pricing”, Intermodal’s analysis concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide

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