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European carbon market to remain oversupplied until 2027

Thomson Reuters Point Carbon predicts ten-year wait for market prices to rebound

The European carbon market (EU ETS) is likely to remain oversupplied with allowances until 2027, according to analysis by Thomson Reuters Point Carbon, the leading provider of market intelligence, news, analysis and forecasting for the energy and environmental markets.

The European Commission is expected to present proposals for a 2030 energy and climate framework by the end of this year. A key element of this 2030 discussion is whether reforms should be implemented to strengthen the EU ETS, in order to get the EU on track towards its long-term ambition to reduce carbon emissions by at least 80 percent by 2050.

“Our price forecast is based on the assumption that the EU takes on a greenhouse gas reduction target of 40 percent by 2030, implying that the reduction factor in the EU ETS would increase from 1.74 percent under the current legislation to 2.5 percent from 2021. However, due to the accumulated oversupply in the market, which is expected to be in the order of 2.5 Gt in 2020, we do not expect the EU ETS to turn to a net short position before 2027”, according to Stig Schjølset, head of carbon analysis at Thomson Reuters Point Carbon.

“Even though it is likely that more ambitious policies will be put in place over the coming years, we think carbon prices will essentially remain at single-digit levels, averaging €7.7/t in the period up to 2020. From the start of phase 4, which is scheduled to run from 2021-28, we expect the market to be short on an annual basis. This will gradually erode the accumulated oversupply and prices will likely increase rapidly as more expensive reductions will be needed to meet the cap. Thus, we expect the EUA price to reach €66/t in 2030”, says Schjølset.

A factor leading to the dramatic prices increase towards 2030 is the anticipated “high carbon” lock-in. Market participants are currently not incentivised to invest in emission abatement technologies, which will likely lead to higher prices and less flexibility in the system over the coming decades.

“Backloading, which now seems likely to be implemented, will not have any impact on the long-term carbon price in Europe. Even though a decision to remove 900 million allowances from the auction volume in 2014-16 would give some support to prices in these years, we expect prices to drop off again from 2019 when the backloaded volume is scheduled to return to the market. In 2020 we expect the EUA price to average €5/t due to the steep increase in the auctioning volume”, added Schjølset.

The long-term price forecast is based on the assumption that the EU will take on a target to reduce greenhouse gas emissions by 40 percent by 2030, that there will be no access to international offsets in the 2021-30 period and that the share of renewables in the final energy consumption will increase to 30 percent by the end of the next decade. Moreover, we expect the annual economic growth in Europe to average 1.6 percent in 2013-2020 and 1.9 percent in 2021-30.

“A price forecast out to 2030 will of course come with a lot of uncertainties, and our sensitivity analysis suggests that significant changes to the macroeconomic outlook would have the largest impact on the carbon price. If GDP growth were 1 percentage point higher every year compared to our base case, we expect EUA prices of €96/t in 2030; while an analogous 1 percent lower annual GDP growth would result in a price of €21/t in 2030, explains Schjølset.

EUA long-term price forecast until 2030:

(€/t)

2013

2014

2015

2016

2017

2018

2019

2020

EUA price phase 3

5

6

8

10

10

11

7

5

 

(€/t)

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

EUA price phase 4

6

9

13

18

24

30

38

46

56

66

 

All prices in the long-term forecast are nominal.


Notes to Editors:

·          The Kyoto Protocol to the United Nations Framework Convention on Climate Change, which entered into force in February 2005, resulted in the launch of the EU’s Emissions Trading Scheme (ETS). The EU ETS is the world’s first international greenhouse gas emissions trading scheme. It works on a cap - and - trade basis, where the total allocation is set at the start of a trading period. EU Allowances (EUAs) are the tradable units under the EU ETS. Up to a certain limit, companies regulated by the EU ETS are also allowed to import carbon permits from third countries (CERs and ERUs).   

·          The current oversupply in the carbon has meant that the markets’ overall value was down last year, for the first time since the EU’s Emissions Trading Scheme (ETS) launched in 2005. Global markets were valued at €62bn in 2012, down from €96bn the year before, equivalent to a drop of 35%. 

·          The estimated oversupply of 2.5 Gt by 2020 is based on the combined allocation of EU allowances and international credits (CERs/ERUs) compared to the expected emissions over the same period. Importantly, the estimate doesn’t include forward hedging, i.e. allowances/credits bought by utilities to hedge their forward sales of electricity for the years after 2020. If forward hedging is included we estimate the oversupply in the market to be reduced to about 1.5 Gt in 2020.

·          Market surplus has lead to a meltdown of prices in the EU ETS. The estimated average global carbon price dropped by 49% to €5.82/t last year, down from €11.45/t in 2011 and €13.09/t in 2010. 

·          Backloading, proposed by the European Commission as a short-term solution to the oversupply in the market, is the temporarily withholding of carbon emission allowances due to come to market between 2013-2015. 

·          The third phase of the EU ETS runs 2013-20 when the fourth phase begins.


For further information, or if you would like to speak to one of our analysts, please contact: 

Jake Hemingway 
PR Specialist, Thomson Reuters Point Carbon 
Mob: +44 (0) 207 542 5204 
E-mail: 
jake.hemingway@thomsonreuters.com

Stig Schjølset 
Head of Carbon Analysis, Thomson Reuters Point Carbon 
Mob: +47 90560459
E-mail: stig.schjolset@thomsonreuters.com