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Analysts see EU carbon prices at Eur56-Eur89/mt by 2030

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Analysts see EU carbon prices at Eur56-Eur89/mt by 2030


Prices seen more than doubling as supply tightens

Long-term targets overshadow bearish virus impact

EU mulls changes to Market Stability Reserve

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  • Frank Watson
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  • Jonathan Dart
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London — Analysts see EU carbon allowance prices under the EU Emissions Trading System rising to a range of Eur56/mt ($67/mt) to Eur89/mt by 2030 in their base-case scenarios, as market reforms tighten the supply balance, according to a webinar Dec. 3.

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If borne out, the more than doubling of carbon prices would have significant implications for the profitability of emissions-intensive fuels and industrial process including coal and lignite for electricity generation and Europe's heavy manufacturing industries such as metals, chemicals and refining.

A group of analysts provided price forecasts as part of a webinar organized by Vivid Economics, at the request of the European Commission, in the context of a review of the EU ETS ahead of planned legislation expected in June 2021.

At the low end of the analysts' range, market analysis company ICIS expects EU Allowance prices to rise to Eur56/mt by 2030. That compares with an average daily closing price of Eur24.29/mt in the period Jan. 1 to Dec. 2, 2020.

London-based Energy Aspects sees a slightly higher price of Eur65/mt by 2030. Bloomberg NEF and financial analysis group Refinitiv see higher prices still of Eur79/mt and Eur89/mt by 2030, respectively.

The forecasts compare with S&P Global Platts Analytics forecasts which show EUA prices rising to Eur48/mt by 2030.

"While the coronavirus outbreak will have longer-term bearish implications for EU ETS demand, our forecast also acknowledges tighter post-2020 EUA supply as well as the ongoing operation of the Market Stability Reserve. These elements can help push prices upward longer-term," Platts Analytics' director of emissions and clean energy, Jeff Berman, said Dec. 3.

The broad agreement on a long-term rising carbon price trend reflects clear policy aims by the EU to tighten supply of allowances over time and use the EU ETS to get the 27-member bloc on track to achieve net-zero emissions by 2050, including the possibility to expand the system to new sectors.

As well as driving out coal and lignite from power generation, much higher carbon prices would also provide a competitive advantage for cleaner technologies, including renewable energy, nuclear, hydrogen and carbon capture and storage projects.

Radical surgery

However, the interplay between various parameters of the EU ETS will be important for price development out to 2030 and beyond, analysts said.

Those elements include the revamped EU 2030 emissions target, which the EC proposed at 55% below 1990 levels, compared with the existing 40% target. If agreed, the deeper goal needs to be reflected in the annual carbon caps under the EU ETS, with decisions on that expected in 2021.

The functioning of the Market Stability Reserve, which controls oversupply of allowances in the market, is also up for review in 2021 and the EU could decide to adjust its annual intake rate of 24% a year, which is set to revert to 12%/year after 2023 under current legislation.

Some market observers believe now is not the time to propose changes to the MSR only two years into its operation.

"As the MSR started in 2019, any assessment based on its track record would translate into analyzing data for just two years. In my opinion that is not enough time to make a full assessment," founder and executive director of the European Roundtable on Climate Change and Sustainable Transition, Andre Marcu, said.

"We are doing radical surgery on this market and it has profound implications for business and industry, and on European life. The MSR [review] will provide some guidance, but we may need some human intervention," he said in the webinar.

Analyst Trevor Sikorski at consulting group Energy Aspects said reducing the surplus of allowances available to market participants carries the risk of sharp price spikes.

"You need a surplus of about 800-900 million mt to provide the liquidity that the market needs currently," he said.

"The more you take allowances away from the market and put them in the MSR, the less it can act as a buffer against price shocks," he said.

Chief sustainability strategist at BNP Paribas Asset Management Mark Lewis said over the long term, carbon prices would inevitably rise to a point where they trigger CO2 abatement, and that could mean much higher prices as the market moves beyond coal-to-gas fuel switching in the power generation sector.

"We need to start preparing people for higher carbon prices, because we've all been living in a world where we think higher prices are politically impossible," he said.

"The EU ETS needs to have the technical ability to adjust the supply of allowances such that the price reaches a level that can deliver on that policy objective [net-zero emissions by 2050]," Lewis said.