Natural Gas Spikes, Political Shift Pose Biggest Risks to EU Carbon Market: Lewis
The European carbon market remains vulnerable to spikes in natural gas prices and the political risk that could come with a wider swing to the right in the European Union, according to leading carbon market analyst Mark Lewis.
“When [the Intercontinental Exchange Dutch TTF natural gas futures price] is high, it means the blood pressure in the carbon market is high, and it could explode,” he told Dow Jones Energy on Oct. 15 at the Carbon Forward Expo in London.
If the front-month TTF natural gas price reaches €100 ($112)/megawatt-hours (MWh) in the coming winter and power prices follow suit, “psychologically, that’s a big deal.” It would bring “another round of pressure on carbon, whatever the carbon price does,” Lewis said.
Gas and Carbon Prices Recouple
The long-term positive correlation between natural gas and European allowance (EUA) prices has strengthened since front-month TTF prices rose above €60/MWh in the second half of 2026, according to OPIS carbon research analyst Guadalupe Ruiz.
In the first half of the year, rising natural gas prices were largely bearish for EUAs, as geopolitical tensions and energy-price volatility weighed on industrial production and economic growth expectations, Ruiz said. By September, however, TTF prices had reached their highest levels since 2022, reviving gas-to-coal switching and making rising gas prices increasingly bullish for carbon markets again, she noted.
“We are already seeing a strong coupling between the two markets. As winter approaches, below-average natural gas storage levels across Europe and heightened tensions in the Strait of Hormuz leave room for further strengthening of this relationship,” Ruiz said.
€90/mt as Political Red Line
A carbon price above €90/metric ton would bring the market closer to what Lewis called the “politically toxic area,” as negotiations on the reform of the EU Emissions Trading System (EU ETS) continue.
Investors and compliance players would be wary of paying more than that, he said. “Nobody wants to see €100/mt on the tape. Particularly not at the moment when we’re right in the middle of these negotiations.”
His comments echoed those of Vitol CEO Russell Hardy, who told the conference on Oct. 14 that carbon policy needs to keep pricing “relatively in check” to prevent the system from breaking.
The most recent OPIS-assessed benchmark December 2026 EUA price was €85.475/mt on Friday, after reaching €87.850/mt on Oct. 13, its highest level since this January.
Still, Lewis sees a stable support level in the €70s/mt. “We’re in a wide band of €70/mt – €90/mt, and a narrower band of €75/mt – €85/mt, until we know the final shape of the [EU ETS] reform,” he said.
Political Pressure in the EU
Lewis does not expect the reform to be agreed before France’s presidential election next spring, while Spain’s snap election “could change the political calculus. You could have Spain flipping from being one of the most ambitious countries to one of the least ambitious countries,” he said.
The European Commission published its proposal for reforming the system on July 17, and the negotiation process in the European Parliament and the Council has already started, with the Irish presidency aiming for agreement among member states by December.
Member states are broadly divided into three camps: a “high-ambition” group including Spain, the Netherlands and the Nordic countries; a “low-ambition” group including Poland, Czechia, Italy and other Central and Eastern European countries; and France and Germany in between, Lewis said in a note published Oct. 9.
“My gut feeling is that we end up with something close to what the EU Commission proposed, but maybe slightly more tilted towards the low-ambition countries, because they’ve got more votes,” Lewis said. The group has a blocking minority, though not a qualified majority, he added.
One of the most controversial elements of the proposal, vehemently opposed by the “low-ambition” countries, is the conditionality clause.
Under this clause, from 2031 industrial operators would receive 80% of their standard free allocation only after the approval of an “Invest in EU” decarbonization plan. The remaining 20% would be released only once investments matching the value of their full allocation have been made and led to significant emissions reductions.
“If you’re holding allowances back, particularly standard free allocation from 2031, that’s a big deal. So, I don’t think that will survive, or it will be diluted significantly,” Lewis said.
He pushed back against arguments that carbon costs are the main threat to industrial competitiveness. “Everybody loves to point the finger at carbon and say this is why Europe’s industry is no longer competitive,” he said.
Lewis reckons that Europe has roughly paid more than €1.8 trillion extra for gas and power over the past five years compared with 2021 price levels, while higher carbon prices have added about €325 billion, or less than 15% of the total increase. Half of these carbon costs go to governments as auction revenues, which could be recycled to low-income households or industry, he added.
“It’s all about gas, really, because the increase in the power prices is down to the increase in the gas price,” Lewis said. “That’s nothing to do with carbon … and yet, that’s where the political pressure comes.”
–Reporting by Nia Simeonova, nsimeonova@opisnet.com; Editing by Rob Sheridan, rsheridan@opisnet.com