EU Carbon Allowances, Gas Decoupling Amid Changing Markets: Goldman

Prices for European carbon allowances and natural gas prices have decoupled amid changing market dynamics, Goldman Sachs’s Michele Della Vigna said, cited by Bloomberg.

• Market dynamics in the carbon markets have changed, including declining emissions caps, as industries are replacing power producers as the biggest buyers of carbon permits.
• In the gas market, Russia’s invasion of Ukraine and with it, the halt of Russian natural gas supplies has triggered new investments in the European energy sector including renewables.
• Gas-fired generation in the EU is set to stay and with new investments in global LNG capacity, gas prices are likely to fall in the coming years.
• Goldman Sachs forecasts that infrastructure investments will raise global LNG supplies by 50% in the next five years, which will lead to a halving of gas prices over the period.
• When assuming the 50% decline in natural gas prices, we would not see inflation in Europe’s energy sector, even with higher carbon prices, Della Vigna said.
• “If anything, the higher carbon price will be a helpful way to make sure power prices don’t fall so much that the development of renewable power becomes challenged from an economics perspective,” he added.
• Concerns over inflation may make the EU less inclined to allow the carbon price “to go much higher than where it is at the moment in a high energy price environment,” Della Vigna said.
• “That’s why cheaper gas should mean higher carbon prices. Not just because of affordability, but also because cheaper gas means European heavy industry can come back and as they come back more emissions come back, which leads to a tighter carbon market from 2026,” he said.