Analysts have revised up their average price forecasts for EU carbon permits for the next three years in anticipation of improving economies in Europe as energy prices fall from record highs.
But they warned an increase in permits sales would keep a lid on gains.
EU Allowances (EUAs) are expected to average 81.40 euros a tonne in 2023 and 94.14 euros in 2024, according to six analysts surveyed by Reuters. That is up 4.2% and 1.9% respectively from forecasts made in October.
The analysts forecast for average prices in 2025 rose by 0.6% to 102.24 euros/tonne.
The European Union's Emissions Trading System (ETS) mandates manufacturers, power companies and airlines to pay for each tonne of carbon dioxide they emit as part of Europe's efforts to meet its climate targets.
European gas and electricity prices have declined from record highs seen last year following Russia's invasion of Ukraine, as Europe built up large gas reserves and as milder than usual weather dented demand.
The sharp fall in energy costs is leading to expectations of an improved outlook for economies across Europe.
"Potential recovery in industrial activities could drive up demand for allowances and support (carbon) prices," Yan Qin, Refinitiv lead carbon analyst said.
The picture, however, is complicated by Europe's "REpowerEU" plan launched last year, to sell an increased number of allowances through government auctions over the next few years to help raise 20 billion euros that would help fund the bloc's transition away from reliance on Russian fossil fuels.
It requires EU member states and the European Parliament to formally approve the plan to begin the sales.
“The front-loading of EU ETS auctions will start some time in 2023, right after the bill is voted upon: as a result, that will put additional bearish pressure on EUA prices in 2023 and beyond," said Goda Aglinskaite, analyst at Clearblue Markets.