A recent analysis by Deutsche Bank economists highlights several market drivers expected to significantly impact carbon prices in 2025, which is viewed as “another transitional year for the EU Emissions Trading System (ETS) market.”

According to Deutsche, Germany’s biggest bank, factors such as weak demand for carbon allowances from both industrial and power sectors as well as the short-term oversupply from the RePowerEU initiative “are expected to constrain upward price movement in 2025.” 

The analysis points to an anticipated 18% increase in supply during 2024-2026  due to the inclusion of maritime sectors and frontloading allowances due to the REPowerEU program. The oversupply “will delay the full impact of structural tightening in the EU ETS until these additional allowances are absorbed,” said the document referring to stricter emissions caps following the Fit for 55 reforms.

According to the bank, investors pursuing opportunities on the European carbon market are facing several risks such as short-term carbon price volatility, unexpected policy changes “possibly from outside the EU” and uncertainty regarding the future industrial demand for EUAs. 

However, beyond these short-term challenges, Deutsche Bank’s analysts expect the European carbon market to tighten significantly from 2026 onwards due to a variety of factors such as: full implementation of CBAM implying gradual reduction of free allocating, complete phase-in of shipping and a sharp reduction in auction supply following the frontloading. 

While acknowledging potential risks, Deutsche Bank paints an encouraging picture for the carbon market. “The longer-term outlook for carbon prices under the EU ETS is therefore probably upwards and this could be an increasingly interesting asset class for investors”, conclude the bank’s analysts.