The early implementation of a proposed reform to the EU Emissions Trading System (EU ETS) could lead to a significant increase in carbon prices, potentially reaching five times the current levels by 2020, according to an analyst at Icis Tschach Solutions. However, the fate of around 1.6 billion excess allowances will have a greater impact on prices than the start date of the proposed Market Stability Reserve (MSR) by the European Commission. If the MSR were to start in 2017 and absorb all backloaded and unallocated allowances, carbon prices could rise to EUR 35.80 per tonne by 2020. A 2019 start would result in prices being around EUR 2 lower. In contrast, if the backloaded and unallocated permits enter the market, average carbon prices would likely be limited to EUR 15.50 per tonne in 2020, falling to a trough of EUR 6.50 per tonne by 2022 based on a 2019 start.
The start date of the MSR is not the main determining factor for price changes; it is the additional supply of allowances that has the most significant impact. Thomson Reuters Point Carbon also highlighted a minimal difference in carbon prices based on the start year, with a more conservative outlook for price gains. They suggested that a 2017 start, including all unallocated supply, could push prices to EUR 18 per tonne by 2020, while a 2019 start would result in prices of around EUR 16 per tonne. If the MSR were introduced in 2018, but unallocated supply returns to the market before 2020, prices would increase to EUR 12 per tonne by 2020 and EUR 15 per tonne by 2022.
The analysts predict that the European Parliament is likely to settle on a 2018 start for the MSR, including unallocated allowances. The parliament’s environment committee is set to decide on its position, with differing views on whether the mechanism should start in 2019 or as early as 2017. The European Commission has expressed openness to ambitious revisions of its MSR proposal, suggesting a start date during the next trading phase of the EU ETS in 2021. However, the parliament and member states still need to negotiate this proposal, as well as the inclusion of unallocated allowances.
The current surplus of allowances exceeds 2 billion, which has been criticized for keeping carbon prices low and not incentivizing pollution cuts.
