European carbon prices remained confined to the narrow trading range seen over the past several sessions, closing Tuesday at €81.34, up €0.48 on the day. The advance snapped a three-session losing streak, although the broader trend remained bearish, with Tuesday marking only the second daily gain in the past nine trading sessions.

Trading volumes remained depressed, with only 14.5 million allowances traded, well below this year’s daily average of 24.2 million. The subdued activity suggests that the summer holiday lull continues to weigh on market participation. However, volumes are also running below the seasonal norm, pointing to an unusually quiet August.

While the carbon market remained largely uneventful, fuel and power markets continued to be driven by sharp volatility. The TTF front-month gas contract dropped to a three-week low as growing expectations of a reopening of the Strait of Hormuz boosted optimism over global LNG supply.

Meanwhile, Italy’s day-ahead power price for Wednesday delivery climbed to €208/MWh, the highest level since December 2022. According to Bloomberg, the rally was driven by hot, dry weather, which boosted cooling demand and forced Italy to rely more heavily on costly gas-fired generation.

Although carbon prices have remained range-bound at the start of August, the underlying fundamentals are becoming increasingly supportive. While the shift of the compliance deadline to September and the revised August auction schedule since 2024 have reduced the month’s traditional seasonal strength, EUAs have still delivered positive returns in August in each of the past two years.

Moreover, persistently hot weather is boosting electricity demand for cooling, while weak wind generation and reduced nuclear output across parts of Europe are increasing reliance on fossil fuel-fired generation. Higher fossil fuel burn should translate into stronger demand for EUAs, providing a constructive backdrop for carbon prices despite the current lack of market direction.