The Covid-19 pandemic has turned Europe’s carbon price upside down, with prices dropping by 40% since early March when they were still trading at about €24 ($26) per metric ton, analyst IHS Markit said.

The current trading levels of between €16-18 per metric ton are roughly two thirds of the level of the high of 2019 of €29 per metric ton.

“This is a perfect storm for Europe’s carbon market, and it may well lead to some challenging questions about its role in Europe’s decarbonisation strategy once the COVID-19 crisis has passed,” said IHS Markit director Coralie Laurencin.

The EU’s emission trading system (ETS) is one of Europe’ main instruments to convince energy-intensive industries and the power sector to switch to a less polluting production. A rise in prices last year has, for example, led to the switch off of several coal-fired power stations across the continent, and given incentives to turn to renewable energy sources.

The drivers of the price collapse in the ETS according to the analyst firm are a reduced economic activity and power demand, as well as lower aviation demand that will lead to lower 2020 emissions across Europe.

At the same time weakening oil prices brought on by an unprecedented fall in global oil demand at a time when current production is outpacing global storage capacity.

Also, bearish financial markets with increased margin calls are reducing non-compliance capital invested in the ETS.

The so-called market stability reserve (MSR) could bring the market back into balance in 2021, though. The MSR removes 24% of excess annually, which amounts to 400m metric tons this year. Of the newly accumulated excess created by Covid-19 in 2021, the MSR will also remove 24%.

Nevertheless, IHS Markit’s outlook for ETS prices ranges from an average of €12.6 per metric ton during the second to fourth quarter of this year to as low as €5 per metric ton on average.