Don't Expect a Return to €100 EUAs Any Time Soon: LSEG

LSEG and maritime decarbonisation firm Siglar Carbon hosted a seminar discussing the EU-ETS and carbon markets in London on Wednesday. Image Credit: Ship & Bunker

The shipping industry should not expect a rapid return to €100 for European Union Allowances for EU-ETS compliance after a collapse in prices since late 2023, according to data and analytics firm LSEG.

LSEG and maritime decarbonisation firm Siglar Carbon hosted a seminar discussing the EU-ETS and carbon markets as part of IE Week events in London this week.

The EU-ETS came into force for shipping at the start of this year, requiring companies operating at European ports to buy EUAs to cover emissions generated on their voyages. The first deadline for surrendering EUAs, for 2024's emissions, will be September 30, 2025.

Paula VanLaningham, carbon research director at LSEG, discussed the recent decline in EUA prices in a presentation at the event.

EUA prices spiked above €100/mtCO2e briefly early last year, and remained in the $70s-90s/mtCO2e for most of the rest of 2023, but have since declined sharply. The ICE March EUA contract traded at €54.38/mtCO2e on Friday afternoon.

"This has primarily been driven by an extremely weak gas market," VanLaningham said.

"It has also been driven by a change to several aspects of the allowance schedule, which has meant there is a lot more supply than originally planned."

No rapid recovery to previous highs can be expected in the short term, she argued.

"We have had a downward revision of where we see prices are going to be when we hit 2030," Vanlaningham said.

"In particular the psychologically significant €100 per tonne level is unlikely to actually come back into the market until much closer to 2030.

"When we ran this, it was 2027; I think when we re-run it, it will probably be closer to 2028 or 2029."

Shipping will play a relatively small role in this market, accounting for about 6% of the total volume covered by the EU-ETS based on 2022 figures, according to LSEG. The industry is the third-smallest involved in the system, ahead of only aviation and pulp and paper.

But the tendency in shipping to make its compliance arrangements at the last minute could still deliver an outsized impact next year. Were European shipping firms all to rush in to EUA procurement at similar times next summer ahead of the September deadline, their collective action may still be enough to deliver a temporary spike in the market, VanLaningham told Ship & Bunker at the event.

"Of course, when IMO 2020 hit in, and the shipping industry was not as prepared for IMO 2020 as one would have potentially hoped, there was a massive spike in different aspect of fuel oil," she said.

"6% is still significant to cause an impact; not, perhaps, to the same degree that it did for fuel oil with IMO 2020, but I would say that if everybody rushes in at once, even 6% could make a big difference in this market, in part because the existing industries are already pretty well-prepared for allowance deadlines.

"As a result of that, you could see a significant spike in liquidity which could absolutely impact prices in the moment; I think the goal is to make sure the shipping industry is prepped so that doesn't happen."