EU Carbon Prices Could Hit USD 112 Amid Iran War Energy Shock
BofA Global Research warns EU carbon prices could surge to USD 112/tonne this winter due to energy shocks and increased coal use.
The European Union's carbon market is bracing for a significant surge, with EU carbon prices forecast to potentially climb to €100 (approximately USD 112.12) per metric tonne this winter. According to a detailed report by BofA Global Research, this spike is being driven by a severe energy supply shock linked to the conflict in Iran, which is forcing a shift in how Europe powers its grids.
The Coal Comeback: Energy Shocks Drive Emissions
The geopolitical instability has sent global energy prices soaring to levels not seen since the start of Russia's invasion of Ukraine. The impact has been stark: oil prices have jumped by roughly 40 per cent since late February, while the cost of natural gas in Europe has more than doubled.
This drastic price hike has flipped the economic script for power generators. Natural gas, once the preferred cleaner alternative, has become so expensive that coal is now the more economical choice for electricity production, even when the associated carbon costs are factored in.
However, the report notes a critical bottleneck: the EU's ability to fully pivot back to coal is limited. Years of strategic efforts to decommission coal-fired power plants have reduced the overall capacity, meaning countries may struggle to switch fuels as much as the market demands.
Tightening the Market: CBAM and Emission Permits
The report highlights that the demand for European Union Allowances (EUAs)—the permits that grant companies the right to emit greenhouse gases—is expected to tighten. This pressure is coming from two main fronts:
- Carbon Border Adjustment Mechanism (CBAM): This policy extends carbon costs to imported goods, effectively broadening the scope of the carbon market.
- Phase-out of Free Allowances: The gradual removal of free emission permits for domestic producers is forcing more companies to purchase allowances on the open market.
The Long-Term Outlook: A Return to Stability?
While the short-term forecast is bullish for carbon prices, BofA expects a cooldown in the coming years. As conflicts subside and new liquefied natural gas (LNG) projects become operational, the energy shock is expected to ease.
The bank predicts that EU carbon allowance prices will drop below €80 (USD 89.70) per metric tonne by the second half of 2027, provided that LNG exports from the Middle East return to normal levels and new infrastructure projects launch as planned.
Transport Shift: The Rise of EVs
Interestingly, the energy crisis is accelerating a transition in the transport sector. Sky-high prices for petrol and diesel are pushing consumers away from traditional combustion engines and toward electric vehicles (EVs).
The shift is particularly evident in the commercial sector; for instance, electric truck sales in China surged by about 80 per cent year-on-year during the first quarter. This trend is expected to weaken the global demand for conventional fuels.
Oil Demand and Total Emissions
Looking ahead, BofA anticipates a dip in global oil demand in 2026, estimating a loss of around 3 million barrels per day. However, a recovery of approximately 4.3 million barrels per day is expected by 2027.
Despite the temporary return to coal for power generation, the report maintains a silver lining: total EU emissions are still expected to decline this year, thanks to significant reductions in other sectors, most notably road transport.