Disclaimer: Recorded November 19, 2025

FAQ: What’s driving today’s European carbon market (EUAs)?

Our Chief Analyst, Arne Lohmann Rasmussen, explains why EUAs have broken away from gas, why prices have risen sharply despite weak energy markets, and what this means for hedging ahead of a much tighter 2025. Here are the essentials – in a quick FAQ.

1. Why have EUA prices risen so sharply when gas prices have been stable?

For much of the year, EUAs closely followed gas because higher gas prices typically push power producers toward coal, increasing carbon demand. Over the past couple of months, however, this link has broken. While gas prices have been flat or even declining, EUAs have risen nearly 25%. Many initially assumed this was simply due to September compliance buying, but the continued price increase into October revealed that something more structural is at play, suggesting the market is pricing in tighter conditions ahead.

2. Why are EUAs rising even though the September compliance effect should now be over?

The market appears to be preparing early for what is expected to be a significantly tighter allowance balance next year. Compliance buying alone cannot explain the move. Instead, both emitters and speculators are buying allowances now because they believe supply will fall short of demand in 2025. Since EUAs can be banked or purchased forward, future tightness is already being priced into today’s market, and this early positioning has supported the ongoing uptrend.

3. What is driving expectations of a much tighter EUA market next year?

Supply is set to decline further due to the linear reduction factor, which reduces the number of allowances each year. In addition, allowances that were sold early under the REPowerEU programme are no longer available in the later years, tightening the balance. Demand is also increasing: shipping will move from covering 70% of emissions this year to 100% next year, and CBAM is gradually taking effect. Meanwhile, parts of European industry, particularly in Germany, are showing signs of recovery, with higher gas and coal use in power generation adding to demand. All these elements point to a structurally constrained market.

4. Is there a political angle that could influence the EUA market?

Yes. The EU ETS is a political system, and recent actions show that policymakers may intervene if prices become too disruptive for industry. Ahead of COP30, the EU delayed parts of CBAM’s free allocation phase-out and postponed the start of ETS2 by a year, signalling concern about competitiveness. Although the immediate price impact was small, it highlighted that rules can be adjusted if prices rise too fast – or if they fall too far and weaken decarbonisation incentives. Arne expects this debate to intensify if prices move above €100 next year.

5. With EUAs around €80, should emitters consider hedging now?

According to Arne, the answer is yes. If you know you will need to surrender allowances over the next couple of years, current levels represent a reasonable entry point. The risk is that a tightening market could trigger a rapid move higher, potentially €10–20 within weeks and possibly above €100 next year. Because EUAs can be purchased and stored ahead of time, hedging now reduces exposure to this potential upside risk and offers stability in compliance costs.