According to analysts from Point Carbon at Thomson Reuters, the level of ambition shown by EU lawmakers is likely to result in an average EU carbon price of €13/t between 2015 and 2020, and an average of €24/t from 2021 to 2030.
Discussions among policymakers have focused on strengthening the European Commission’s proposal for carbon market reform, particularly regarding the start date of the Market Stability Reserve. There is debate about whether 900 million excess “backloaded” allowances should be placed in the reserve instead of being auctioned on the market as initially planned. These allowances, which were delayed in 2014 to reduce oversupply, are set to return to the market in 2019 and 2020, potentially undermining the carbon market’s effectiveness in reducing emissions.
Point Carbon analysts believe that policymakers will reach a compromise to start the reserve in 2018 and transfer the backloaded allowances to the reserve instead of returning them to the market. They expect the final compromise between the Parliament and the Council to favour an early start date, potentially in 2018 or 2019.
The expected market reform is predicted to gradually increase the carbon price. Point Carbon analysts forecast an average carbon price of €13/t from 2015 to 2020 and €24/t from 2021 to 2030. Compared to the European Commission’s initial proposal, the more ambitious version of the market reform is expected to raise prices by €5/t on average up to 2020 and by €3/t on average from 2021 to 2030.
The implementation of the Market Stability Reserve is seen as a crucial factor driving price expectations. A steadily increasing carbon price would provide predictability for investors, encouraging them to consider the EU ETS in their business decisions.
Point Carbon analysts estimate that, if the Market Stability Reserve is implemented as assumed, companies will reduce 250 million tons of CO2 from 2015 to 2020. However, if the mechanism starts operating in 2021 as proposed by the Commission, companies are expected to be less inclined to invest in emission reduction technologies, leading to a projected reduction of 140 million tons by 2020.
The outcome is uncertain, as the Parliament and the Council are still forming their positions on the Market Stability Reserve. The next critical step is the Parliament Environment Committee vote on February 24th, with analysts expecting the committee to support an early start of the reserve. Subsequently, the process will move to the Parliament’s plenary, which will provide the mandate for trialogue negotiations with the Council.