Hotter weather forecast to lift carbon price in August

Last month, power demand dropped m/m and was again well below average, demonstrating the EU economy’s continued struggle. As a result, the carbon price fell. Next month, we expect the carbon price to be range-bound slightly above today’s price, due to slight upside pressure from reduced hydropower output and increased power demand from cooling. The economy and industrial output still pose a downside risk – while not forecast, if activity slows further and power demand declines again, carbon prices will fall.

Power demand will remain low in August as the economy continues to struggle

Power demand was below average again in July, suggesting the economy is continuing to struggle. As per our latest data, industrial production reached an all-time low in May and the outlook for steel profitability – a leading indicator of industrial output – is forecast to remain low in Q3. The outlook for the economy and industry remains weak, but unchanged, so the impact of these factors on the carbon price will be minimal in our base case. However, a weak economy and poor industrial output still pose downside risks to the carbon price. With a warmer-than-average August forecast, power demand will put some upwards pressure on the carbon price with increased demand from cooling.

Dry, hot weather will dampen renewable output in August

In July, both hydropower and wind output were below average and decreased m/m. Hydropower reservoir levels have also declined and are below the historical average for the time of year. A drier-than-average August is forecast, so hydropower output will likely decrease further over the next month. This will have a small upwards impact on the carbon price. Windspeeds are also forecast below average over the next ten days, and wind output is not expected pick up from last month’s levels, so any impact on carbon price will be minimal.

Minimal gas-to-coal switching expected in August as fuel prices will be stable

There was some gas-to-coal switching in July, as gas use fell back into the historical relationship of gas use versus gas price. This would have had a small upwards impact on the carbon price. EU gas storage is high for the time of year, and supply is good, so gas and coal prices are both forecast to be stable in August. As gas use is already sat in the middle of the historical relationship of gas use versus gas price, we expect minimal gas-to-coal switching in August. Overall, gas-to-coal switching will have no impact on the carbon price over the next month.

Steady nuclear power output expected to continue into August

In July, European nuclear power output increased m/m for a second month in a row and y/y. French nuclear performed above average for the whole month, avoiding any strikes/forced closures as seen in previous months that had caused output to drop. The outlook for nuclear over the next month is good, with no major strikes or closures planned. Overall, nuclear will have little differential impact on the carbon price in August.

If you want to hear more about carbon market developments and our short-, medium- or long-term carbon price forecasts provided as part of CRU’s Sustainability and Emissions service, please email us at [email protected] – we’d be happy to discuss this with you.

About The Authors

Lottie Zayed , Sustainability Analyst

Lottie joined CRU Sustainability in 2023. Prior to this, Lottie obtained her M.Res. in Green Chemistry, Energy and the Environment from Imperial College London and her B.Sc. in Chemistry from Cardiff University. She has also gained experience through an internship in the sustainability team of a chemical fertilizer company, where she researched the use of new technologies on reducing emissions. Lottie is based in CRU's London office.

Paul Butterworth , Research Manager

Paul moved to CRU's newly-formed Sustainability team in August 2021 where he is working closely with clients and internally on carbon market and energy transition issues. Paul joined CRU in 2012 and, latterly, was responsible for CRU's analysis across the whole steel value chain, from raw materials through to finished steel, as well as CRU's Steel cost services, a comprehensive suite of cost models covering iron ore mining, coal mining, steelmaking and ferroalloys operations worldwide.

Mark Jeavons , Head of Sustainability

Mark has over 15 years’ experience in a variety of leadership roles spanning sustainability and investment. He is the Head of CRU’s Sustainability division, providing thought leadership and guidance on sustainability, climate change and their market implications, which helps clients to better understand, address and integrate sustainability themes into their decision-making.

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Upcoming Events & Webinars

Center for Automotive Research Management Briefing Seminars

CRU's Alex Ruxlow is at this year's CAR Management Briefing Seminars happening until August 8th at the Grand Traverse Resort in Michigan.

We are thrilled to be part of this key industry event that has been bringing together the brightest minds and boldest ideas for over 58 years. Alex is on the ground meeting with clients and prospects. If you're at the event, we'd love to meet you! Reach out to Alex or to the team to schedule a meeting.

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