In the London office of a carbon trading fund, traders stare in disbelief at their screens: the EU Emissions Trading System (EU ETS) carbon permit price has fallen below €65/ton, wiping out all gains from the past six months. Their algorithmic trading system has automatically triggered sell orders, exacerbating the decline.
On February 5th, the EU carbon market experienced its most severe single-day drop since its inception, with carbon permit prices plummeting 30% to €62.4/ton. The trigger was the European Commission’s simultaneous release of two conflicting reports: one showed that EU industrial carbon emissions decreased by 18% year-on-year in 2025, far exceeding the 11% target; the other indicated that renewable energy installations in the first three quarters of 2025 were 40% lower than expected. This means that carbon reduction has been achieved not through energy transition but primarily through reduced industrial activity.
This “carbon crash” has exposed the fundamental flaws in the design of the carbon market mechanism. According to EU ETS rules, when carbon prices are too high or too low, the Market Stability Reserve (MSR) should intervene. However, the current price volatility has far exceeded the mechanism’s response capacity. Analysts at BloombergNEF point out that the deeper issue is Europe’s deindustrialization trend: high energy prices have forced 15% of chemical and steel production capacity to shut down or relocate, with the majority moving to the United States and the Middle East, where energy costs are lower.
The chain reaction is spreading across the entire green industry. Shares of European renewable energy companies fell across the board, with Ørsted dropping 12% and Siemens Energy falling 9%. More critically, over €30 billion in green bond projects tied to carbon prices have had their financing costs raised. The European Investment Bank has urgently announced it will provide bridge loans, but this cannot conceal the market’s loss of confidence in carbon pricing mechanisms.
Developing countries are also affected. Africa’s largest carbon offset project—the Congo rainforest conservation program—has seen the prices of its carbon credits halve, directly jeopardizing $200 million in funding for indigenous communities. This event may accelerate the trend of global carbon market fragmentation, with India and Brazil considering suspending the linkage of their carbon markets with the EU system.
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