In February, we forecast the carbon price would decrease from €78 /tCO2 to ~€74 /tCO2. However, the price dropped further than expected to €72 /tCO2. Although wind output fell overall, lifting fossil fuel use, US steel and aluminum tariff announcements on 11 February caused uncertainty , which pulled down the carbon price.
Wind speeds did rise towards end-February, which kept the carbon price low at month-end, and are forecast to lift to above average levels into March. This will lead to lower fossil fuel use overall, assuming wind speeds remain at least at average levels for the whole month. Some gas-to-coal switching that took place in February will be reversed as gas prices fall back, though gas prices remain high relative to coal. However, continued volatility of wind output will ensure the preference for gas power for dealing with wind intermittencies will remain in place, despite the economic incentive for further gas-to-coal switching.
Power demand remains low when compared to seasonal levels due to a poor economy and warmer-than-average temperatures. CRU’s monthly updated Global Economic Analysis suggests any improvement in economic activity will be minimal in 2025 Q1. Nuclear power will fall back in March, but this is a seasonal shift, whereas an increase in hydro output will have some downward impact on EUA demand.
With these factors, the carbon price forecast is that it will drop to €70 /tCO2 in March.
Recovering wind puts downside pressure on carbon price
Wind speeds are forecast to continue increasing to above the March historical average over the next few days. Even if wind output is at average levels for the whole of March, this will reduce EUA demand by ~2.0%. There is further downside risk if wind speeds remain at forecasted, above average levels, and the carbon price could fall further than our base case forecast.
Hydro output was slightly above the historical average for February. Reservoir levels also remain strong with average rainfall in February, which was an increase compared to January. Forecasts show rainfall at average to slightly above average levels going into March. Therefore, we expect hydro will be at slightly above average levels, which will have a small downwards impact on EUA demand and the carbon price projection next month.
End-February wind recovery expected to continue into March
DATA: WindEurope, CRU Sustainability; NOTE: the cut-off date of the data used in the blog post is 24th February 2025
Gas-to-coal switching undone
As wind output increases in March, reliance on fossil fuels will reduce – a major driver of carbon price next month. Some gas-to-coal switching occurred in February as the economic incentive to increase coal use became too strong to ignore, but switching that took place will be reversed in March as gas prices are forecast to drop further than coal. This is despite gas use remaining high given its price relative to coal due to a current preference for gas power for dealing with wind power intermittencies. However, there remains an upside risk that gas-to-coal switching continues due to the underlying economic incentive to do so.
A poor economy and above average temperatures
Steel profitability and production forecasts for 2025 Q1 were upgraded last month, but power demand remains below the historical average for February. The economic outlook overall remains poor and any recovery is forecast to be gradual. Our view is that economic conditions will remain poor going into March and temperatures are forecasted warmer than average. Therefore, power demand will remain low in March but will have minimal differential impact on the carbon price projection.
Nuclear output will drop in March
Nuclear output decreased in February in line with historical precedent. Historically, output also decreases in March and, with no news of strikes or closures, the expectation is that the fall will not be exceptional and nuclear power will have minimal differential impact on the carbon price in March.
If you want to hear more about carbon market forecasts and our short-, medium- or long-term carbon price forecasts provided as part of CRU’s Sustainability and Emissions service, please email us at sales@crugroup.com​ or download a brochure – we’d be happy to discuss this with you.
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