BofA sees EU carbon allowances reaching €100 this winter

By Daniel Okafor

EU carbon allowances could trade as high as €100 ($112) per metric tonne this winter, Bank of America Global Research said, as an energy shock linked to the Iran war raises European gas costs and makes coal more attractive to power generators.

The forecast, cited by India’s ChiniMandi, concerns EU allowances, or EUAs, the carbon credits used under the EU Emissions Trading System (EU ETS). BofA’s near-term call rests on coal becoming cheaper than natural gas even after generators include carbon costs, not on an assumption that every sector will emit more.

Why are EU carbon allowances under pressure?

Oil prices have risen about 40% since late February, while European natural gas prices have more than doubled, BofA said. That reversal changes the fuel economics for European generators and encourages them to burn more coal.

Years of reductions in the EU’s coal-generation capacity could limit how far utilities can switch fuels. BofA sees coal’s relative cost advantage as a pressure point for allowance demand, not proof that coal output will surge without limit.

Expensive gas creates the immediate price risk; reduced coal capacity limits utilities’ response.

Can EU policy tighten allowance demand?

Two changes could tighten the allowance market:

• The Carbon Border Adjustment Mechanism (CBAM) extends carbon costs to certain imports.
• The gradual phaseout of free allowances for domestic producers could add allowance buying.

The bank did not quantify either measure’s contribution to allowance demand, so the €100 winter forecast should be read as a market scenario rather than a calculated effect from either policy.

A separate related item in the source says EU policy friction will drive Norway to spend $1.1 billion more on foreign carbon credits.

Both policy changes can add buying pressure, but BofA has not quantified their effect.

Could EU carbon prices fall below €80 in 2027?

BofA expects prices to moderate as the conflict eases and additional liquefied natural gas (LNG) supply becomes available. Under that scenario, EU carbon prices would fall below €80 per metric tonne in the second half of 2027, provided Middle Eastern exports return to normal and new LNG projects begin operating as planned.

The cited summary names no LNG projects and gives no capacities or operating dates. BofA’s lower-price case therefore rests on delivery and export recovery, rather than on operating capacity already secured.

Lower prices depend on new LNG supply arriving and Middle Eastern gas exports normalizing.

How does transport demand offset coal’s rise?

Higher petrol and diesel prices have encouraged consumers to drive less and consider electric vehicles, potentially reducing demand for conventional fuels. China electric truck sales rose about 80% year on year in the first quarter, BofA said.

BofA expects global oil demand to weaken by around 3 million barrels per day in 2026 before recovering by approximately 4.3 million barrels per day in 2027.

BofA expects total EU emissions to decline this year despite a possible increase in coal-fired generation, supported by cuts in other sectors, including road transport.

Transport cuts partly offset coal’s rise, and BofA still expects EU emissions to fall this year.

What decides the next move?

The regulatory watchpoints are CBAM’s treatment of imports and the phaseout of free allowances. The market trigger is new LNG supply: BofA expects EU carbon prices below €80 per metric tonne in the second half of 2027 if Middle Eastern exports normalize and new LNG projects begin operating as planned.