The cost of carbon dioxide emissions into the atmosphere is set to be decoupled from gas prices in the European Union, marking a historic shift in the dynamic between the two markets, according to the head of natural resources research for the EMEA region at Goldman Sachs Group Inc.

The E.U. is facing “a complete rupture of the historical narrative where less gas has always meant lower carbon emissions,” Goldman Sachs’ Michele De La Vinia said in an interview.

The development reflects changing dynamics affecting the carbon market, including shrinking emissions caps, with industry replacing power producers as the biggest buyers of pollution permits and “a complete change in the natural gas market,” he said.

Until now, gas prices have tended to move in tandem with the price of carbon allowances. But that relationship is unlikely to last, the analyst added.

Russia’s invasion of Ukraine sparked a new wave of energy investment in Europe as the bloc sought to address supply gaps.

This race has not only led to an increase in renewable energy production, but with natural gas having received approval in the EU’s “green” tax legislation, its supply is, now, set to increase significantly.

Goldman predicts that infrastructure investment will increase global LNG supplies by 50% over the next five years, leading to a halving of gas prices over that period.

This has a significant impact on inflation and will ultimately have a big impact on carbon prices, he said.

Assuming that the price of gas will fall by 50%, “then in reality, even with a higher carbon price, we will not register energy inflation in Europe, we will not have a hit to consumers or industry,” De La Vinia noted.

“If anything, a higher carbon price will be a useful way to ensure that energy prices do not fall so much that the development of renewable energy is put into question from an economic point of view,” he added.

Concerns about inflation may make the EU less willing to allow the price of carbon emissions “to rise much more than it is at the moment in a high energy price environment. For this reason cheaper gas should actually mean higher carbon prices. Not only because of affordability, but also because cheaper gas means that European heavy industry can recover and as it recovers, it produces more emissions, which will lead to a tighter carbon market from 2026 onwards.”

“The industry has turned to developing a new infrastructure for liquefied natural gas,” he said, adding that “this is now ready to come on stream.”

This development has the potential to drive the price of carbon dioxide allowances in the European Union’s Emissions Trading System (ETS) up to 130 euros per tonne by 2028, De La Vinia said.

This year, prices have averaged around 66 euros/tonne, according to BloombergNEF.

The EU’s carbon market is set to shrink significantly in the coming decades, as the union has set a goal of achieving net zero by mid-century. BloombergNEF analysts predict that EU carbon prices will rise to nearly 150 euros/tonne by 2030.

In addition to constrained supply, prices will also be driven higher by “increasing compliance obligations to curb emissions from industries whose emission reduction options are more costly than their energy sector counterparts,” said BloombergNEF analyst Juan Chang.

At the same time, financial market participants have been buying allowances in anticipation of higher prices, De La Vinia pointed out.

As an asset, carbon allowances traded on the ETS can offer value if investors believe prices will rise, “which they are going to do, according to our estimates,” he noted.

“Clearly in a period of surplus the market tends to be weaker, which we’ve seen over the last couple of years,” he said, adding that “from 2026, that surplus is likely to turn into a deficit.”

Carbon allowance prices are currently lower after the EU promoted increased supply to help generate revenue for member states and move away from Russian energy supplies, Chang said.

For many industries, it is still cheaper to exceed emissions caps than to invest in technologies to reduce or remove carbon dioxide from the atmosphere. But with higher prices for carbon allowances just around the corner, it looks like that will soon change.

Emissions from sectors covered by the ETS fell by 16% last year, representing the largest annual reduction ever recorded.

The EU, which has set a target of cutting emissions by at least 55% by 2030, is gradually reducing its ETS allowance offer as part of a defined strategy to try to force key sectors to decarbonise.

Since 2005, when the EU ETS was launched, emissions produced by the companies it includes have fallen by 41%, according to official EU figures.

This has led to a 28% reduction in total emissions across the European Union. Over time, the list of sectors covered by the ETS has expanded, with shipping being a recent addition.