European Carbon Prices Projected to Reach €100 This Winter Amid Gas Cost Pressures

European carbon prices could rise to €100 (USD 112.12) per metric tonne this winter as high natural gas prices linked to the Iran war encourage power generators to increase coal use, pushing up emissions, according to a report by BofA Global Research.

The report stated that the energy supply shock has driven global prices to their highest levels since Russia’s invasion of Ukraine. Oil prices have risen around 40 percent since late February, while European natural gas prices have more than doubled.

According to the findings, coal has become more economical than natural gas for European power generators, even after accounting for carbon costs. However, years of declining coal-generation capacity across the European Union could limit the extent to which countries can switch fuels.

"Putting it all together, we expect EUAs could trade up to €100/MT this winter as high European gas prices spur further growth of coal generation," the report noted. EUAs are permits that allow companies to emit greenhouse gases under the European Union’s carbon market.

BofA further indicated that the EU’s Carbon Border Adjustment Mechanism (CBAM), which extends carbon costs to imports, and the gradual withdrawal of free emissions allowances for domestic producers could tighten the carbon market by increasing demand for permits.

However, the bank expects carbon prices to ease in the longer term as the conflict subsides and new liquefied natural gas (LNG) projects come online. It projects EU carbon allowance prices to fall below €80 (USD 89.70) per metric tonne in the second half of 2027, assuming Middle Eastern LNG exports return to normal and new projects start operating as expected.

The report also highlighted the impact of elevated fuel prices on transport demand and emissions. Higher petrol and diesel costs have encouraged consumers to reduce driving and shift towards electric vehicles (EVs), weakening demand for conventional fuels.

BofA observed that electric vehicle sales have grown strongly across major markets, while electric truck sales in China rose around 80 percent year-on-year in the first quarter. This shift could accelerate reductions in petrol and diesel demand if current sales trends continue.

Additionally, the bank expects global oil demand to weaken in 2026, with demand losses estimated at around 3 million barrels per day, before recovering by approximately 4.3 million barrels per day year-on-year in 2027. Despite higher coal generation, BofA expects total European Union emissions to decline this year, supported by reductions in other sectors, including road transport.

"Global energy shocks demonstrate how geopolitical conflicts quickly ripple through supply chains, directly impacting operational and regulatory costs for businesses. For enterprises navigating international markets, sudden shifts in commodity prices and carbon compliance costs highlight the need for resilient operational planning. At the same time, the accelerated transition toward electric vehicles and alternative fuels shows how rising conventional energy costs can permanently reshape consumer demand and drive long-term sustainability trends across global markets." — Dr. Shishir Gupta, Founder & CEO, StartupLanes