BofA sees EU carbon permits hitting €100/tonne this winter

BofA sees EU carbon prices rising to USD 112/tonne amid Iran war-driven energy shock

New Delhi, October 23

The report said the energy supply shock had driven global prices to their highest levels since Russia's invasion of Ukraine, with oil prices rising around 40 per cent since late February and European natural gas prices more than doubling.

The report said coal had become more economical than natural gas for European power generators, even after accounting for carbon costs. However, years of declining coal-generation capacity across the European Union could limit the extent to which countries can switch fuels.

"Putting it all together, we expect EUAs could trade up to €100/MT this winter as high European gas prices spur further growth of coal generation," the report said. EUAs are permits that allow companies to emit greenhouse gases under the European Union's carbon market.

BofA said the EU's Carbon Border Adjustment Mechanism (CBAM), which extends carbon costs to imports, and the gradual withdrawal of free emissions allowances for domestic producers could further tighten the carbon market by increasing demand for permits.

However, the bank expects carbon prices to ease in the longer term as the conflict subsides and new liquefied natural gas (LNG) projects come online. It expects EU carbon allowance prices to fall below €80 (USD 89.70) per metric tonne in the second half of 2027, assuming Middle Eastern LNG exports return to normal and new projects start operating as expected.

The report also highlighted the impact of elevated fuel prices on transport demand and emissions. Higher petrol and diesel costs have encouraged consumers to reduce driving and shift towards electric vehicles (EVs), weakening demand for conventional fuels.

BofA noted that electric vehicle sales had grown strongly across major markets, while electric truck sales in China rose around 80 per cent year-on-year in the first quarter. The shift could accelerate reductions in petrol and diesel demand if current sales trends continue.

The bank also expects global oil demand to weaken in 2026, with demand losses estimated at around 3 million barrels per day, before recovering by approximately 4.3 million barrels per day year-on-year in 2027.

Despite higher coal generation, BofA expects total European Union emissions to decline this year, supported by reductions in other sectors, including road transport.

— ANI