The European carbon market reversed course during Tuesday’s trading session, giving back all of the strong gains recorded a day earlier. The downturn followed Monday’s rally, when the EUA December 2025 contract settled at its highest level in five months.

The benchmark contract settled at €80.19, down 1.96% on the day, marking its steepest daily decline in ten weeks. The sell-off was likely driven by the renewed escalation of tensions between the United States and Iran, as investors grew increasingly concerned about the conflict’s potential impact on global financial and energy markets.

Wednesday morning, the carbon market initially appeared to be caught between opposing forces: support from stronger energy prices, as renewed tensions in the Middle East revived concerns over potential supply disruptions, and pressure from weaker equity markets, where investors moved away from risk assets amid rising geopolitical uncertainty.

The United States said it launched coordinated military strikes against Iran on Wednesday after three commercial vessels transiting the Strait of Hormuz were reportedly attacked by Iranian forces a day earlier. U.S. officials described the operation as a direct response to those incidents and said its objective was to protect commercial shipping in the region.

Oil markets reacted sharply to the developments. Oil prices surged nearly 6% after U.S. President Donald Trump said Wednesday that the interim agreement with Iran was “over,” although he added that talks would be allowed to continue, ABC News reported. Meanwhile, Europe’s benchmark TTF front-month gas contract also climbed around 6%, extending the strong gains recorded in the previous session. Analysts at ING noted that “the latest re-escalation only adds to concerns about tightness as Europe moves closer to the heating season.”

The deteriorating geopolitical backdrop also weighed on broader financial markets. President Trump’s latest remarks cast further doubt on the durability of the ceasefire, reinforcing investor concerns that the conflict could escalate further. European equity markets traded lower as risk appetite weakened, a sentiment that also spilled over into the carbon market, adding bearish pressure to EUAs.