Climate policy aimed at reducing CO2 emissions will be the main driver of price surge

In the recent research GMK Center aggregated long-term carbon price expectations of nine organizations and made own consensus forecast – €147 per ton CO2 in 2030. Consensus forecast is based on expert survey, which reflects market sentiment and unites different opinions.

Forecasting CO2 prices considers several factors: policy parameters, abatement costs, decarbonization of power sector, hedging and speculation strategies of market participants. Depending on forecast approach, different drivers play major role.

The main reasons for future increase of CO2 price are associated with policy parameters, which are aimed at reducing supply of carbon allowances through different instruments:

  • decreasing emission cap according to Fit for 55 targets;
  • activity of market stability reserve, which absorbs surplus allowances from the market;
  • regular decrease of benchmarks for free allocations;
  • gradual decreasing free allocations due to CBAM implementation since 2026. In 2034 free allowances for sectors under CBAM regulation will be cancelled.

Abatement costs reflect expenses associated with introduction and use of low-carbon technologies. Appropriate CO2price can increase competitiveness of “green” technologies, that is why CO2 price and abatement costs are interconnected and impact each other.

Other factors impacting CO2 price includes situation in power sector and hedging and speculation. Power sector is the largest purchaser of carbon allowances as it generates about 50% of carbon emissions in the EU ETS, so situation in power sector will significantly impact on CO2 prices. Hedging and speculation unite trade strategies of different market participants, which can lead to decreasing circulation of carbon allowances.

As we reported earlier, GMK Center have supported Hy24 in equity investments to H2 Green Steel (H2GS). Hy24 is co-led of private placement that enabled H2 Green Steel to attract €1.5 bln in equity. GMK Center provided Hy24 consulting services on the analysis of the possible impact of the green energy transition on the EU steel market.