European carbon prices could hit €100 this winter as Iran war drives up gas

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An energy supply shock has pushed oil and European gas prices higher, changing fuel economics and reshaping the region’s carbon market outlook.

By ANI

Updated - October 23, 2026 at 01:04 PM. | New Delhi

FILE PHOTO: European carbon prices could rise this winter as high natural gas prices encourage power generators to increase coal use. | Photo Credit: Reuters

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 said the energy supply shock had driven global prices to their highest levels since Russia’s invasion of Ukraine, with oil prices rising around 40 per cent since late February and European natural gas prices more than doubling.

High gas prices make coal more economical

The report said coal had 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.

• Read also: ‘You’re inviting disaster’: Piyush Goyal slams EU carbon tax on steel

“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 said. EUAs are permits that allow companies to emit greenhouse gases under the European Union’s carbon market.

Carbon market rules could tighten supply

BofA said 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 further 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 expects 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.

Higher fuel costs accelerate shift to electric vehicles

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 noted that electric vehicle sales had grown strongly across major markets, while electric truck sales in China rose around 80 per cent year-on-year in the first quarter. The shift could accelerate reductions in petrol and diesel demand if current sales trends continue.

Oil demand outlook points to recovery in 2027

The bank also 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.

Published on October 23, 2026

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