Veteran Trader Predicts Further Decline in Carbon Market Amid Policy Uncertainty

Louis Redshaw, a seasoned carbon trader and founder of Redshaw Advisors, is forecasting a 38 percent plunge in the price of pollution rights over the next 12 months. Redshaw’s bearish outlook makes him the most pessimistic among 10 analysts and traders surveyed by Bloomberg News regarding the price outlook for the coming year.

European regulators are grappling with an excess of permits in the carbon market, resulting in an 86 percent decline in prices since 2008. This oversupply has weakened incentives for renewable energy investments and undermined the penalty for using polluting coal. Despite a three-year program aimed at reducing the availability of allowances, prices have not rebounded, and the next regulatory intervention is not scheduled until 2019.

Redshaw expressed doubt about the commitment of European leaders to market-driven emission reductions, stating that buying up the excess permits is necessary to boost prices. He predicts that allowances will fall to around €2.50 per metric ton by the end of next year, his most bearish stance since prices nearly reached zero nine years ago. In contrast, the survey’s median forecast for 2017 is €5 per ton, compared to the predicted €5.40 per ton for the end of 2016.

While other commodities, such as Brent crude, are expected to see positive price movements, carbon futures for December have plummeted 48 percent this year to €4.28 on the ICE Futures Europe exchange in London.

The European Union distributes allowances through giveaways and auctions to entities such as factories, utilities, and airlines, which must match their carbon dioxide emissions or pay fines. The surplus of permits was temporarily reduced in 2014 through supply withholding, but with the end of those curbs and the shift to cleaner-burning natural gas, an additional 520 million permits are expected to enter the market over the next two years. To absorb this surplus would cost over €2 billion at current prices. Energy Aspects Ltd. estimates that the accumulated surplus will increase by 7.1 percent in the next two years, reaching levels similar to the EU’s annual supply.

As Europe prepares for further market reforms, including the implementation of a market reserve, analysts have varying expectations. Some, like Espen Andreassen of Markedskraft ASA, anticipate a boost in optimism and prices due to the market stability reserve and efforts to meet the goals of the Paris climate agreement. However, Mia Bodin of Bodecker Partners AB remains skeptical, emphasizing the need for supply reductions before expecting any significant changes. She predicts prices around €5 per ton by the end of 2017.