Analysts discount fears of added 900m carbon market surplus

Analysts Downplay Impact of Unused Industrial Carbon Market Allowances

Analysts have downplayed the potential impact of a build-up of unused industrial sector carbon market allowances, as identified by Dutch consultancy Ecofys. The surplus of allowances, estimated to be between 500-900 million, is expected to occur over the current trading period (2013-2020). However, analysts argue that the surplus is unlikely to affect prices in the short term due to timing and expectations of legislative change.

Louis Redshaw, founding director of Redshaw Advisors, highlighted that the present trading period is too distant for utilities’ short-term hedging requirements, and companies are hesitant to speculate on future supply that may not materialize or could change based on European Commission decisions. The European Commission has proposed a market stability reserve (MSR) to address the surplus and boost prices, with reform advocates pushing for an earlier implementation of the reserve.

Analysts suggest that industrial demand for carbon market allowances is expected to increase in the coming years, particularly with the European Central Bank’s introduction of quantitative easing. The stimulus measures are anticipated to have a positive impact on the EU economy, reducing the need for capacity reductions and increasing the demand for allowances. Bernadett Papp at Vertis Brokers expressed confidence that any unused permits would likely fall well below the 900 million estimates.

The European Commission has proposed measures to address surplus allowances, including spreading their return over three years instead of one. European parliamentarians are also considering changes to the EU ETS, such as directly including surplus allowances in the MSR or eliminating them altogether. The fate of backloading allowances and unused allowances from Eastern European countries will also impact the surplus. However, analysts believe that the Ecofys figures may be on the high side.

The European Commission declined to comment on the Ecofys projections, emphasizing that it will propose ETS reform after the adoption of the MSR.

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