Proposed Stricter Post-2020 Free Allocation Rules Encourage Industrial Companies to Buy Instead of Sell Carbon Surplus
Proposed stricter post-2020 free allocation rules are expected to reshape the behaviour of industrial companies regarding their carbon surplus, according to analysts. Instead of selling their surplus for profit, these rules would incentivize companies to shift towards buying allowances. This change would mitigate a potential bearish market driver and support ongoing reforms to stabilize carbon prices. EU manufacturers, who have accumulated surplus EU allowances (EUAs) due to reduced emissions from lower production levels, have previously sold portions of their surplus to boost their balance sheets. However, with the proposed reforms tightening free allocation rules, companies are anticipated to reduce or halt their selling activities and consider purchasing EUAs instead.
The proposed reforms by the European Commission are projected to have significant long-term effects on the carbon market. Observers anticipate a shift in behaviour as manufacturers become more reluctant to sell their surplus. This shift is already being observed, as the reduction of free allocation in the previous phase prompted a more proactive stance from manufacturers, potentially leading to increased buying activities. Analysts suggest that the tightening of free allocation rules would be bullish for EUA prices in the long run. Companies facing reduced free allocation would be encouraged to hold onto their surplus and consider purchasing EUAs as a hedge for future production. However, the full impact of these changes is expected to be more pronounced in later phases.
Although the proposed changes hold potential, the adoption process involves multiple stages, including approval from the EU parliament and council. Consequently, it may take several years for these reforms to come into effect, during which significant lobbying efforts are expected from influential groups in Brussels. European industrial associations have already voiced strong opposition to the proposed measures. Nevertheless, analysts agree that the impact of the proposed changes will primarily be felt in the future, with companies gradually adjusting their behaviour and strategies in response to the tightened free allocation rules.
