The European carbon market remained on a downward trajectory last week, recording losses in four of the five trading sessions. Prices settled at €85.41 per tonne on Friday, down 0.5% on the day, bringing the overall weekly decline to 1.8%.

Despite subdued trading activity on Friday, weekly volumes reached 114 million allowances, the highest level in a month and above the semester average. The increase in trading activity is particularly notable in the post-compliance period, when market participation typically weakens, suggesting more active positioning amid shifting market conditions.

Another notable development was the divergence between gas and carbon prices, two markets that traditionally move in tandem. While carbon prices declined, front-month TTF gas futures rose by 7.5% over the week. Typically, higher gas prices encourage a shift towards coal-fired power generation, increasing emissions and, consequently, demand for carbon allowances. 

However, this relationship failed to materialise last week, suggesting that rising energy costs are increasingly fuelling concerns over industrial output and, consequently, weaker demand for carbon allowances. 

Furthermore, with ongoing discussions over EU ETS reform, higher gas prices could further intensify pressure from energy-intensive industries for measures aimed at easing compliance costs, adding another layer of uncertainty to the carbon market outlook.

Also, current forecasts favour a milder-than-average European winter, a bearish signal for carbon prices as heating demand weakens. However, low gas inventories, LNG supply uncertainty and the risk of later cold spells could still support energy prices later in the winter.