An online workshop organized by ZERO looked into the factors influencing the evolution and volatility of the EU ETS carbon price, against the backdrop of the war in Ukraine. 

At an online event on 29 March, Ingvild Sorhus, a Senior Analyst at Refinitiv, gave an interesting outlook on the carbon price evolution claiming last year was unprecedented as we saw an increase of almost 150% in carbon prices. While in 2021 this rapid price increase was mainly related to the surge in energy prices in Europe, what we are observing in 2022, particularly after the beginning of the war in Ukraine, is a short-term decoupling of the carbon price from the energy complex.


When the Russian invasion of Ukraine began, EU carbon prices came crashing down to €55/t. Why? Ingvild pointed to, among other explanations, the liquidation of EUA positions to cover margin call in energy, concerns that climate policy was going down the political agenda, worries over demand disruption due to high energy prices, and, similarly, industries selling surplus allowances to counteract cash constraints. 

These factors combined in what Ingvild called a “snowball effect” which led to an unprecedented decline in the carbon price. 

So what role does speculation have? 

Alessandro Vitelli, an independent carbon reporter, clearly underlined that the EU ETS is a market mechanism and, as such, invites speculation. However, speculation is still a very small, albeit active, part of the market. Industry does not typically trade allowances; they are bought and kept for compliance every year. Therefore, to have price discovery, allowances must be traded and this is where speculators and investors play a role. The speculative investment funds are also quite sensitive to better investment opportunities elsewhere, so much so that “in 2022, when prices didn’t push on after the €95/t, the investment funds started reducing their positions, (…) cashing in EUA money and putting it to work in other markets”. 

After the initial crash immediately following the invasion of Ukraine, EU carbon prices have since recovered to previous, unprecedentedly high, levels. Ingvild stated that the Market Stability Reserve (MSR) is the tool that lessens the impact of both the short and long-term effects of the Ukrainian war.


The war in Ukraine also brought a change in discourse: we are now talking more about coal phase-in instead of coal-phase out, said Ingvild. In fact, Alessandro revealed that as the invasion of Ukraine begun to unravel, gas prices consistently rose higher, while coal prices did not rise as much, meaning that coal became more profitable than gas. 

Ingvild noted that the sustained high gas prices of the later months of 2021 have been driving the power sector to burn more coal, which will in turn increase short-term power sector emissions. This is expected to continue, particularly as the need to avoid Russian gas becomes ever more adamant For gas to reenter the fuel mix, Alessandro mentioned the carbon price would have to go up to €200, depending on the thermal efficiency of the plant. 

Nevertheless, both speakers highlighted that coal supplies are dwindling in Europe and the amount of actually being burned is insufficient to overcome the increase in demand from industry. The high-energy prices have kept industry struggling and forced a decrease in production, to which the net effect would be an emissions reduction, pointed Alessandro. 


Even though Alessandro warns that with the war in Ukraine still unravelling, “we could be in for a long time of volatile markets”, yet a clear message resounds. As Ingvild pointed out: “the war has emphasized that it is a risk in being reliant on fossil fuels and, if we want to make Europe more resilient to these threats, then greening is the way to go”.

EU ETS revenues can play a decisive role with the possibility of respective frontloading from innovation funds to push the shift that is needed at a much faster pace than ever before. 

The political signal is still strong, said Ingvild. So industry, take note: “if you are to survive in Europe as an industry, you know that you have to go in the direction of climate neutrality”. 


Our partners
LifeETX is implemented by a consortium of 10 NGOs working at national and European level