When the European Union decided to sell carbon allowances to raise money for the REPowerEU plan, market participants worried that the decision would have massive bearish implications on prices due to increased supply combined with increased uncertainty over the number of additional allowances to be auctioned.

The European Commission proposed in 2022 that part of the REPowerEU program be funded through the sale of EU ETS allowances with a monetary target of €20 billion raised over 2023-2026.

Assuming an average price of €75, the European Commission calculated an additional 266,7 million allowances to be auctioned until 31 August 2026. From that total, 40% are to be raised by bringing forward allowances that otherwise would have been auctioned between 2027-2030.

Two years later since the REPowerEU was proposed, it looks like all the initial concerns were unfortunately well-founded. The decision to increase supply has already started to exert downward pressure on EUAs at the worst time possible due to lower demand for allowances. Verified emissions dropped by 15,5% in 2023 “steepest decline since this compliance carbon market was established in 2005,” according to the Commission.

Furthermore, current lower prices mean more allowances flooding the market and leading to “a downward spiral that jeopardizes the European climate protection architecture,” as stated by Markus Krebbe, RWE head quoted by Montel News last month.  

Numerous questions emerge about whether the Market Stability Reserve (MSR), a mechanism designed to limit the number of allowances in circulation, is fit enough to absorb the current as well as the future surplus.

 According to Matteo Melotti, a carbon expert quoted by Montel News, raising money for REPowerEU plan would inflate supply by a total of 87 million allowances in 2024 and 2024, adding to the 16 million allowances last year. “The MSR should still support the market, although less than it would have without the additional REPowerEU sales,” he added.