2024 Year in Review EU ETS: Flattening out

Prices down, volumes up 

By far the world’s largest carbon market in terms of traded volumes and value, the EU ETS covered around 1.1 Gt (billion tonnes) of CO2 emissions in 2024, mainly from heavy industry, fossil power plants, airlines, and shipping.

The volume of covered emissions is modest compared to the Chinese ETS, which includes 5.2 Gt annually just from the power sector. What makes Europe stand out, is the high level of liquidity. On average, each allowance unit – EUA – changes hands ten times throughout the year, a much higher rate than in the other leading carbon markets.

2024 marks the first year since 2016 that the total market value of Europe’s carbon trading has come in lower than the previous year, at 0.3% less than in 2023. This contrasts with the preceding years, marked by a 150% jump in value in 2021, then more modest growth in 2022 and 2023. Veyt’s assessment of EUA market value in 2024 – defined as traded volumes times prices – shows a market value of €781 billion. See Figure 1 and Table 1.

The traded volume rose from 9.2 bn to 11.8 bn units (see a breakdown of volumes below), but this was outbalanced by the weakening prices. The average price of the EUA front-year futures contract, the reference price for European carbon, dropped from €85/t in 2023 to € 66.5/t in 2024. Throughout the year, it moved in a range between €52/t (on 23 February) and €77/t (on 3 Jan). See Figure 2.

Having reached an all-time high just above €100/t on 21 February 2023, the EUA Dec futures contract retreated significantly in H2 of 2023, and the downward trend continued into 2024, with EUA demand dwindling amidst declining power emissions, and against a gloomy economic outlook.

During the first months of the year, weakening gas prices weighed on carbon, whose fluctuations continue to some extent to correlate with gas. Also, cheap gas squeezed more CO2-intensive coal out of the power generation merit order. When this situation reversed with the gas rally in early spring, carbon started a steady rebound that lasted until June.

Gas price developments have been important for carbon both for day-to-day trading and for the year-ahead view. For the day or week ahead horizon, carbon continues to take direction also from temperatures (heating and cooling needs) and the variable nature of renewable power generation, which determine short- to medium-term needs for fossil-based power generation.

We assess that two dominant competing price drivers were at play in 2024, both of which will continue to be influential. Feeble demand pulled prices down, reflecting Europe’s weak industrial output over the last couple of years, and the fact that renewable and nuclear energy is pushing fossil fuels out of the power mix across much of Europe.

The fact that prices have nevertheless held up comparatively well is due to the longer-term supply-demand trajectory: from 2026 onwards, the annual issuance of emission allowances (the cap) will drop at a much faster rate than projected actual emissions. This will produce a gradually expanding negative gap between issuance and demand for EUAs.

Other drivers have also impacted EUA price developments in 2024, although less importantly and constantly. Most notably, speculations about a possible increase in the EUA volumes sold to co-finance the REPowerEU programme (see below) weighed on carbon until the European Commission clarified on 21 November that no adjustment would be made before September 2025.

Futures, spot, and auction volumes increased

Futures contracts continue to represent the lion’s share of traded value in the EU ETS – they account for 85%, as shown in Table 1 and Figure 1. Spot is the second largest segment, at 9%.

The auctions of fresh EUAs that take place nearly every day at the EEX exchange make up the remaining 6%. Proceeds from the sale of these EUAs go to the respective member states’ governments, the Modernisation Fund, the Innovation Fund, and REPowerEU.

On a volume basis, the split among segments is roughly the same as for market value. Compared to 2023, the transacted volume of futures was up 30%, to 10.2 billion units, while the spot volume was up 10%.

The auction volume increased by 15%, reflecting more frontloading of EUAs for REPowerEU than in 2023, increased Modernisation and Innovation Funds, and a general upward adjustment of auction volume in H2 based on the June calculation of total number of allowances in circulation (TNAC). 

In terms of revenues, the EUA auctions raised €38.8 billion overall in 2024, down 11% from 2023.

Some €24.6 billion went to the member states, €6.3 billion entered the Modernisation Fund, and another €2.3 billion to the Innovation Fund, see Figure 3.

About €5.6 billion were monetised for the REPowerEU programme, of which €3.4 billion was sourced from the Innovation Fund and €2.2 billion from the member states’ auction volumes.

Supply increased as cuts were offset by scope expansion and bigger auctions

The amount of EUAs in circulation is a function of supply and demand. Overall, the issuance of allowances follows the ETS cap trajectory decided in 2018 for the years 2021-2030 (the fourth trading period). As stipulated for 2024, the linear reduction factor increased from 2.2% to 4.3% - this strongly decreases the amount of EUAs coming into circulation through auctions and free allocation. The 2024 issuance was further reduced by a one-off cut of 90 m EUAs, to help align the cap trajectory to the target of reducing ETS emissions by 62% by 2030.

Frontloading of EUA auction volumes to help finance the REPowerEU programme to kickstart the green transition has the opposite effect on the cap. Some 87 m EUAs were frontloaded – added to the 2024 auction volume – 51.4 m higher than the 2023 REPowerEU volume of 35.3 m. 

Overall, the auction volume increased by 76 m to 599 m EUAs. All EU funding mechanisms showed an increase in volumes whilst Member State volumes decreased, see Figure 4.

Another big change in 2024 was the scope expansion of the EU ETS to include emissions from shipping (the maritime sector), which added 78.4 m EUAs to the cap. Similar to how emissions from intra-EU flights must be accounted for by air carriers as the EU ETS covers the aviation sector, ship owners now monitor and report actual greenhouse gas emissions from intra-EU maritime transport, then purchase and surrender a corresponding amount of EUAs. For the first two years (2024 and 2025) the compliance obligations are only partial (see more details below).

Overall, 1,134 m EUAs were issued in 2024, of which 599 m were through auctions and 535 m through free allocation, mainly to industry installations. This is 4.7% higher than the 1,083 m issued in 2023 when the auction volume (521 m) was only affected by REPowerEU in the second half of the year.

On 1 June 2024, the European Commission announced the TNAC (the annual surplus indicator) to be 1,112 million EUAs, equivalent to 1.112 Mt (1.1 Gt) worth of CO emissions), in line with the 2023 number (which was sharply down from 2022). 

Based on the TNAC, the Market Stability Reserve, operating at a 24 percent intake rate, will soak up 267 million EUAs between 1 September 2024 and 31 August 2025.

The ratio between the roughly 1.1 bn EUAs that were theoretically available for trading and the actual transacted traded volume of 11.8 bn can be seen as an indicator of liquidity in the EU ETS. On average, each EUA is transacted ten times throughout the year.  

Textbox 1 gives a quick overview of how key parameters have been changed and how that will affect issuance going forward. The recalibration is done to align the EU ETS with the new 2030 target of reducing emissions by at least 55% across the economy.

Power emissions down, industry flat, aviation up

As for emissions, which represent the demand side of Europe’s carbon market, we estimate a 4.6% drop, from 1,149 in 2023 to 1,096 Mt in 2024. This reflects a significant cut in power emissions (from 505 to 439 Mt), flat industry emissions (591 Mt), and an increase in aviation emissions (from 53 Mt to 58 Mt). Maritime emissions were included in 2024 and with the 40% coverage in the first year, emissions are estimated at 34 Mt.

In the power sector, the drop in emissions reflects the increasing share of share of renewables and nuclear in the mix. Europe continued to build out solar and wind capacity, and hydropower production saw a large increase year-on-year due to more favourable hydrological conditions.

A breakdown by type of fuel, in Figure 5, shows that wind and solar combined rose from 675 TWh to 723 TWh, up 7%. Hydropower was up 8%, to 510 TWh.

After two years of weak production, partly due to unplanned maintenance at several French plants, nuclear generation was up 5% in 2024, to 616 TWh. One new reactor started delivering electricity to the grid in May 2023 (Olkiluoto 3, in Finland), and another in December 2024 (Flamanville 3, France).

The increase in emission-free power generation has come at the expense of all fossil fuel sources. Coal (lignite and hard coal combined) was down 15% in 2024, to 262 TWh. Gas was down 7%, to 393 TWh. See more details in Figure 6.

Total electricity generation, at 2,709 TWh, was up 1.1% from 2023.

For the industry sector, Veyt’s analysis indicates 591 Mt of emissions in 2024, one megatonne up from the previous year. This modest increase stems chiefly from a minor rebound in some of the EU’s materials producers.

Comparing production for the first three quarters to previous years, Figure 7 shows that metals, one of the biggest industry segments, was up 2% from 2023, mainly due to higher steel output). Domestic steel deliveries have dropped because of less demand from Europe's struggling automotive sector, but higher exports have offset this, contributing to the overall uptick in industrial output.

Pulp and paper was up 3%, while oil and gas was up 1%. Other segments, such as chemicals, continue to contract, but less so than in 2022.

When translating production to emissions, we see a strong increase in the relatively small segment of pulp and paper. This is offset by drops in the relatively larger segments of cement and chemicals. See Figure 8.

Overall, the slight boost in certain energy-intensive segments has largely counterbalanced emission reductions in other areas, leaving industry emissions on a flat trajectory, up 1 Mt from 2023.

Inclusion of maritime

The extension to maritime emissions means an adjustment in supply and demand. Broadly speaking, ships over 5000 GT, carrying goods or passengers, will need to surrender EUAs equivalent to their actual emissions. To alleviate the burden for shipowners in the first two years, they only need to cover 40% of their 2024 emissions and 70% of those in 2025. We estimate that the compliance obligation for 2024 amounts to around 35 million EUAs.

This assessment factors in higher shipping emissions in 2024 than the preceding years, as most container ships and tankers from Asia to Europe have taken the longer route around the Cape of Good Hope to avoid the risk of missile attacks in the Red Sea. Coal ship emissions on the other hand have been decreasing over the last years, as Europe’s demand withers with increasing renewable power production.

CBAM moving ahead

The European Union's Carbon Border Adjustment Mechanism (CBAM) came into force on 1 October 2023. It is meant to gradually replace the free allocation of EUAs and become the new tool to protect European industries against unfair competition from manufacturers located in jurisdictions that put no or a very low price on carbon.

Through the transition period (2023-2025), importers of iron & steel, aluminium, cement, fertilisers, hydrogen, and electricity are required to report on their emissions.

In January 2024, the European Commission published two initiatives for secondary legislation for CBAM implementation. The first piece of legislation establishes procedures and conditions for accrediting and overseeing CBAM verifiers. As the reporting procedures become stricter, requiring actual installation-level data, these activities will become more important.

The second initiative will lay down rules for purchasing CBAM certificates, as well as the re-purchasing of these certificates by the relevant authority. As laid out in the CBAM regulation, CBAM certificates are not tradeable. Instead, price risk can be mitigated through the re-sale of up to one-third of a declarant’s total CBAM certificates to the issuing body at the purchase price.

From 2026, the regulated importers will be required to purchase and surrender certificates corresponding to their total emissions, less the share dictated by the phase-in schedule.

China and the other BASIC countries see CBAM as a protectionist tool and have protested, e.g. at last year’s climate summit in Baku, Azerbaijan. Still, the EU’s CBAM seems to be on a firm course and it will likely be applied to more sectors after its review in 2026.

Fit for 55 being implemented

Compared to the preceding years, marked by the Fit-for-55 reform and the energy crisis, 2024 was arguably less dense in terms of energy and climate policy initiatives. The EU ETS revision was formally adopted in May 2023, making 2024 a year of implementation, in which the European Commission passed several delegated acts, to complete the carbon trading framework for the years up to and including 2030.

Even so, ETS-specific policy developments were an important price driver for carbon in 2024, most notably during the autumn, when market participants tried to anticipate how much auction volume would come to market through the REPowerEU auctions. Many expected that the volume would be increased in response to dropping prices, and this weighed further on the market.

The Commission’s confirmation, in November, that volumes will not be adjusted, at least not before September 2025, provided support in the last month of 2024.

Energy policy more generally continues to be on traders’ radar. Gas and power prices have come down a lot since the crisis in 2022, softening the sense of acute urgency, but the fact that European industries (and households) are still facing higher costs than the US and China, remains a point of worry and was pointed out as an important problem in the Draghi report (see below). 

New focus areas: 2040 climate target, Clean Industrial Deal

The first major climate and energy policy event in 2024, was the European Commission’s communication and impact assessment on a 2040 climate target. Released on 6 February 2024, the documents address the lawmakers (the European Parliament and the Council), suggesting a 90% reduction as an intermediate target, bridging the 55% target for 2030 and the net zero target for 2050.  

The 2040 target and the surrounding process will be of key importance for the EU ETS, as it will define the overall framework for the years 2031-2040. The higher the overall ambition, the deeper the cuts that will need to take place in the EU ETS-covered sectors.

The draft plan from February 2024 envisages ambitious cuts across all sectors of the economy, particularly in power generation, industry, buildings, and transport, sectors that are or will be subject to cap-and-trade of emissions allowances. The Commission proposes to bring down emissions – across the economy – to around 750 Mt in 2040. Factoring in nearly 400 Mt worth of natural and engineered CO2 removals, that leaves net emissions of some 350 Mt, a 90% drop from 1990. See more in our initial take on the Commission’s communication.

A group of 11 member states voiced support for “an ambitious climate target for 2040” and the topic has been on the agenda for several energy councils, until December, when member states expressed a lukewarm support for a 2040 climate target.

New Parliament and New Commission

On a more general policy level, the big thing that happened in 2024 was the European Parliament elections in June. It ushered in more right-wingers, but a broad coalition of centrist parties still hold the majority.  We assessed that the rightward shift will not kill the Green Deal, but it will probably dilute future climate ambitions in the name of industrial competitiveness.

Europe’s firm focus on competitiveness was confirmed in a report presented by former ECB chief Mario Draghi in August, which has since been referred to regularly by policymakers and lobbyists. See our take on how the report deals with energy markets.  

The leaders of the member states reconfirmed Ursula von der Leyen as President of the European Commission in July. She proposed a new college of commissioners in September, which was interviewed and approved by the European Parliament on 27 November. VDL promised that the new Commission would be guided by a ‘competitiveness compass’.

The European Parliament has not yet replied to the Commission's communication and impact assessment on the 2040 target.

Carbon removals and international carbon credits

With a looming shortage in the EU ETS from 2027 onward, stakeholders are wondering how to bridge the gap between residual emissions (expected to be substantial up to 240) and the quickly dwindling issuance of fresh EUAs. One possible remedy is allowing for the use of carbon removal units to offset some of the emissions covered by the EU ETS.

The EU Carbon Removals Carbon Farming (EU CRCF) Regulation entered into force on 26 December 2024 following its publication in the Official Journal of the EU on 6 December. The framework sets out the rules for quantifying, monitoring, and reporting the climate benefits of carbon removal activities in the EU. The CRCF got its final approval by the European Council on 19 November, after a trilogue agreement between the Council and Parliament was reached in February 2024.

Most EU ETS stakeholders are primarily concerned with, well, the EU ETS, but some are also following global trading of so-called voluntary climate credits, typically generated on the back of emission mitigation projects in developing countries and sold to governments or companies in Western countries. For them, COP29 in Baku, Azerbaijan, last November brought a welcome breakthrough on Article 6 of the Paris Agreement, the clause that will provide common rules on the international trading of such units. See our take: Article 6 – who got what at COP29.

CID and 2040 target will be key files in 2025, ETS review in 2026

The Clean Industrial Deal (CID) will be on the radar of all energy and climate policy stakeholders in 2025. The European Commission is due to unveil a concrete plan on 26 February 2025 that should help bring down energy costs and trigger investments in decarbonising industry.

Since global energy costs are largely beyond the control of Europe’s policymakers, they will probably focus on two courses of action. One is to pursue a ‘buy Europe’ policy that will to some extent shield European cleantech manufacturers.

The other is to facilitate access to R&D funding for European cleantech. We argue in our what-to-expect-from-the-CID analysis that the EUA auction revenues will probably be up for discussion again, potentially raising the question of whether more of this money should be distributed at the EU level rather than by the individual member states.

Also, a legislative proposal to put a 2040 climate target into the Climate Law. A draft proposal is expected in late February, possibly on the same day as the Clean Industrial Deal. The Commission aims to complete the target setting in time for the international climate summit in Brazil, in November 2025 (COP30.

Once the 2040 target is decided, the next step will be to recalibrate the entire climate and energy policy framework for the years 2031-2040. The next full-fledged revision of the EU ETS, to make it fit for the 2040 target, will start with the European Commission presenting a draft legislative proposal, tentatively scheduled for June 2026.

We can be all but certain that the revision will raise the question of how to integrate removal units and possibly also international climate credits into the EU ETS post-2030, a period where the supply-demand balance is set to be increasingly short.   

Textbox 2. Methodology