The number of EU emissions trading system (ETS) allowances traded on European energy exchange EEX in 2023 fell by 5pc from a year earlier, driven by a decline in derivatives volumes.
A total of 932.3mn EU ETS permits changed hands on EEX over the course of last year, exchange data show, down from 982.6mn in 2022.
The largest absolute fall was recorded in EU ETS futures volumes, which declined by 97.8mn, or just over a fifth, from a year earlier to 368.7mn in 2023. Options volumes posted the largest proportional fall of 70pc, declining by 7,000 to 3,000.
Lower industrial activity and rising build-out of renewables reduced the call on fossil fuels in the region last year, weighing on demand for carbon allowances. Gas-fired generation in the EU fell to a five-year low last year.
And the growing overall proportion of renewables in utilities' production assets is reducing their forward hedging needs, as their exposure to the EU ETS falls.
Traded volumes of EU ETS derivatives declined on the exchange despite the launch of a new market maker scheme for its spot, futures and spread products in October, which EEX said at the time had a "positive impact on the order books".
But this may have been a factor in the rise in secondary spot volumes, which rose by 10.3mn, or 35pc, last year to 40.3mn.
Primary market auction volumes — which are dictated by a combination of the system's supply cap, the number of allowances allocated free to energy-intensive industries deemed at risk of carbon leakage, and the absorption of excess supply into the market stability reserve — rose by 37.2mn, or 8pc, in 2023 to 523.3mn.
Outlook
Primary market auction volumes will increase this year owing to an upward adjustment of the supply cap to account for the inclusion of maritime emissions in the EU ETS from 1 January 2024, and the sale of 86.7mn additional allowances to raise funds for the REPowerEU initiative.
Around 3.1mn allowances will be on offer in each EU-wide sale over January-July, compared with 2.41mn-2.66mn over the same period last year, while volumes will no longer be halved in August, as they were previously to account for lower demand during the summer holiday period.
But any increase in compliance buying stemming from the expansion of the scheme could be limited, as only 40pc of shipping emissions will be covered this year, and operators will not need to surrender the relevant allowances to the EU until 30 September 2025.
Renewable capacity will continue to increase in the region this year, which is likely to further squeeze the share of fossil fuel-fired assets in the EU generation mix. But any recovery of industrial activity would at least partially counteract this effect.
