Understanding the Recent Decline in EU Carbon Prices and Its Implications

Impact of Falling EU Carbon Prices

By Susanna Twidale

Reasons Behind the Price Drop

LONDON, Feb 13 (Reuters) - Europe's benchmark carbon prices fell sharply this week to their lowest level since August 2025, sending shares in some power firms and EU industrials down with them.

Effects on Company Shares

Here's what you need to know about the European Union's Emissions Trading System (ETS) and what happened.

Industry Perspectives

WHAT IS AN EMISSIONS TRADING SYSTEM?

Future of the EU Carbon Market

An ETS sets a cap on the amount of CO2 emissions that a sector, or group of sectors, can produce. The cap decreases each year, to ensure emissions fall over time. The system creates CO2 permits, called EU Allowances (EUAs) for those emissions, which companies must buy for each metric ton of CO2 they emit.

WHO IS COVERED?

The EU's ETS, launched in 2005, covers about 40% of all EU emissions, forcing manufacturers, power plants and airlines flying within Europe to submit EU carbon permits each year for their emissions.

WHY DID THE PRICE FALL

Prices fell around 7% on Thursday after German Chancellor Friedrich Merz said late on Wednesday that Europe’s carbon market should be revised or even postponed at a gathering with industry executives.

Other EU leaders backed the idea on Thursday as they met in Belgium for a summit on European competitiveness, some of whom demanded the EU intervene in the carbon market to lower prices. 

At around 71 euros/metric ton on Friday, the benchmark EU carbon contract has fallen almost 20% since the beginning of the year.

Some EU lawmakers said the EU should slow the pace at which sectoral emissions caps are reduced. The European Commission also said it is looking to overhaul the support it gives to heavily emitting industries to prevent them moving to areas with lower pollution standards. 

Some industries, such as steel and aluminium plants, are already given a free allocation of carbon permits, set using industry benchmarks and decreasing over time.

WHY DID THE CARBON FALL IMPACT COMPANY SHARES?

Carbon costs are embedded into European power prices with gas- and coal-fired power generators paying for each ton of carbon they emit and the cost being added to electricity prices. That means low carbon prices benefit polluters and have an adverse impact on firms with low-emission power generation such as renewable and nuclear power generators.

Shares in offshore wind giant Orsted fell almost 4% and Finland’s nuclear power producer Fortum fell 6.5% on Thursday.

In addition, shares in cement makers, Heidelberg Materials and Holcim fell. 

Analysts at Berenberg said that carbon regulation has been a positive for the cement sector, leading to efficiencies and higher prices for cement so manufacturers can recover carbon costs.

Firms that need to buy carbon credits often hedge their demand years in advance. Analysts have typically predicted prices would keep rising as the emissions cap is cut. Companies with large hedges of carbon permits could find they have paid more than they needed to for future cover if changes to the system meant prices continued to fall.  

WHAT DO BUSINESSES SAY?

Many industry leaders have been vocal about the need to reform carbon pricing to help restore Europe’s competitiveness.

Jim Ratcliffe, founder of European chemicals giant Ineos, said this week the bloc's chemicals industry will not survive without lower power and carbon costs and called on the EU to suspend carbon levies for five years.

Other firms, such as utilities, argue that changing regulations could undermine investment in clean power technology. Emissions trading industry group IETA said long-term investment decisions depend on a credible and resilient regulatory framework and warned against increased political intervention in the market.

WHAT HAPPENS NEXT?

The EU is already planning to review the ETS, with a proposal due in Q3. That review was planned to redesign the system to comply with the bloc's 2040 climate target rather than making short-term interventions to limit prices, but fierce lobbying on all sides is expected in the run-up to the discussions.

(Reporting By Susanna Twidale;Editing by Elaine Hardcastle)