Carbon price to average €13/t in next five years on expected market reform

29/01/2015TR

 

 

Point Carbon – The level of ambition so far demonstrated by EU lawmakers will likely lead the EU carbon price to an average of €13/t between 2015 and 2020 and an average of €24/t from 2021 to 2030, according to the Point Carbon team at Thomson Reuters.

 

Policy makers are debating whether and how to strengthen the European Commission proposal for carbon market reform, the so called Market Stability Reserve. Discussions have focused on the Commission’s proposed start date for the reserve in 2021. Policy-makers are also debating whether to place 900 million excess “backloaded” allowances in the reserve, instead of auctioning them on the market as current legislation requires. The EU decided in 2014 to delay the auctioning of 900 million allowances to reduce the market’s oversupply, but these allowances are now set to return to the market in 2019 and 2020. “The wave of permits that could flood the market later this decade will undermine the carbon market as an instrument to reduce emissions cost-effectively”, said Emil Dimantchev, senior carbon market analyst at Thomson Reuters. In addition to the backloaded allowances, Point Carbon analysts expect that close to 400 million allowances will remain unallocated by 2020 and be subsequently auctioned to companies, creating further downward pressure on the carbon price.

Lawmakers have so far shown willingness to reform the market. Point Carbon analysts think policy makers will reach a compromise to start the reserve in 2018, and expect them to move the 900 million backloaded allowances to the reserve instead of returning them to the market. “We think there is support for a more ambitious market reform than initially proposed by the European Commission, and expect the final compromise between the Parliament and the Council to favour an early start date, potentially in 2018, and a transfer of the backloaded allowances to the reserve”, says Hæge Fjellheim, senior carbon policy analyst at Thomson Reuters. “The level of political ambition shown in the Parliament leads us to assume that Parliamentarians will converge around a start date in 2019. We see more resolve for an early start in the Council, which we assume could pull the start date towards a compromise of 2018.”

The Point Carbon team expects the carbon price will rise gradually from now on as a result of the assumed market reform. The Point Carbon analysts forecast the expected political agreement to lead the carbon price to an average of €13/t from 2015 to 2020 and €24/t from 2021 to 2030. Compared to the initial proposal from the European Commission, the more ambitious version of the market reform is expected to increase prices with €5/t on average in the period up to 2020 and with €3/t on average from 2021-30. “The design of the Market Stability Reserve is the single most important factor driving our price expectations until 2030,” said Dimantchev

“A steadily increasing carbon price will provide predictability to investors, compared to a price that frequently changes direction, such as the one that would result from the Commission’s MSR proposal. If you know prices are on their way up, as a market participant, you are more likely to account for the EU ETS in business decisions,” added Dimantchev.

According to the Point Carbon team, the carbon price will encourage companies to reduce 250 million tons of CO2 from 2015 to 2020, if the Market Stability Reserve is implemented as assumed. If, however, the mechanism starts to operate in 2021, as proposed by the Commission, companies are expected to be less inclined to invest in emission reduction technologies. The analyst project companies will reduce 140 million tons by 2020 with the Commission’s MSR proposal. “The more companies have to wait for the carbon market to be reformed, the more business decisions will be taken without consideration of carbon constraints” said Dimantchev.

Whether policy makers will actually deliver the upward price trajectory is still far from guaranteed. The Parliament and the Council are in the process of forming their positions on the Market Stability Reserve. A critical next step will be the Parliament Environment committee vote on 24 February. Thomson Reuters analysts expect the Environment committee to back an early start of the reserve. The analysts expect the process to then move on to the Parliament’s plenary which will provide the mandate for trilogue negotiations with the Council.

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