Ten-year wait predicted for carbon price rebound

27 September 2013


Carbon prices in Europe's emissions trading scheme (ETS) will remain at single-digit levels until at least 2020 even if more ambitious policies are put in place to strengthen the scheme, according to new analysis.

The forecast, from Thomson Reuters Point Carbon, indicates that the effects of carbon permit oversupply in the ETS will be felt for at least ten years, with prices only rebounding in phase four of the scheme, scheduled to run from 2012 until 2028.

The ETS is the cornerstone of the EU's policy to reduce greenhouse gases, but an oversupply of the carbon permits that are traded in the scheme has caused carbon prices to plummet.

The European Commission is expected to present proposals later this year for a climate framework to 2030, including measures to strengthen the ETS.

However, even when more ambitious policies are included, carbon prices are likely to stay low for some time, according to Thomson Reuters' analysis, which is based on the assumption that the EU takes on a greenhouse gas reduction target of 40 per cent by 2030.

"Even though it is likely that more ambitious policies will be put in place over the coming years, we think carbon prices will essentially remain at single-digit levels, averaging €7.7/t in the period up to 2020," said Stig Schjølset, head of carbon analysis at Thomson Reuters Point Carbon. "From the start of phase 4, we expect the market to be short on an annual basis. This will gradually erode the accumulated oversupply and prices will likely increase rapidly as more expensive reductions will be needed to meet the cap.

"Thus, we expect the EUA [carbon permit] price to reach €66/t in 2030."

Carbon permits are tradeable allowances that enable power plants and other industrial installations to emit greenhouse gases. A higher price means that it costs more to emit gases and encourages operators to invest in technologies to reduce their carbon footprint.

The European parliament recently voted to remove carbon permits from the ETS in order to reduce the oversupply and boost prices. This is unlikely to have a major impact on the market as the measure is only temporary. "Even though a decision to remove 900 million allowances from the auction volume in 2014-16 would give some support to prices in these years, we expect prices to drop off again from 2019 when the backloaded volume is scheduled to return to the market. In 2020 we expect the EUA price to average €5/t due to the steep increase in the auctioning volume," added Schjølset.

 

 



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