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The European carbon price will average €6.6 per tonne in 2016, according to projections by the Point Carbon team at Thomson Reuters.
“We expect the shaken market confidence to result in a slow price recovery from current lows,” said head of EU carbon analysis Marcus Ferdinand.
It’s after EU Emissions Trading Scheme (ETS) allowances shed around 45 per cent of their value in the first two months of the year. Last month the price reached a 22-month low, with analysts attributing the fall to a mild winter, speculation and a continued glut of permits.
Although the surplus currently stands at 1.7 billion, the EU has been removing allowances from the market in order to bring it down – a process known as backloading. 300 million allowances were backloaded last year and another 200 million will go this year.
The Carbon Point team predicted that the excess will fall to 1.5 billion in 2016, pushing up prices. They by 2030 the market would start reach a a balancing point, with supply broadly matching. Accordingly they predicted that the carbon price would average €10/t in 2020 and €26/t in 2030 (2015 prices).
The analysts raised concerns about the Market Stability Reserve (MSR) which will come into being in 2019. All the allowances which have been backloaded up until that point will be transferred into the reserve. It will act as a balancing mechanism, with allowances being transferred to and from the market in order to match supply and demand.
However, Ferdinand fears that the MSR will be “unable to maintain a stable carbon price” as it will only be able to withdraw 12 per cent of excess allowances each year. He said their analysis showed that without changes “any ramp-up of complementary climate policies will continue to undermine the stance of the [ETS] as the EU’s flagship climate policy”.
Policy makers are currently meeting to discuss the carbon market rules beyond 2020. Senior analyst at Thomson Reuters, Emil Dimantchev, said although this could be used as opportunity to address the surplus of allowances, it seemed unlikely, as “so far the debate has been laser focused on how to insulate industry from the carbon price”.
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