EU carbon prices dropped below €5 on Tuesday to its lowest for 22 months as analysts slashed their forecasts and some observers urged lawmakers to step in with tougher reforms.
The Dec-16 EUA contract ended down 28 cents to €4.97 after falling to as low as €4.95 – the lowest since March 2014 – on heavy volume of more than 28 million.
Today’s bottom represents a 40% drop since the end-2015 price of €8.29.
The plunge has forced analysts to cut their forecasts by as much as two-thirds, with some predicting that the market had not yet reached its bottom, according to a Carbon Pulse poll published before the market opened on Tuesday.
“We have not seen prices bottom yet, and a rebound will not last,” said analysts at GDF SUEZ Trading, one of 12 polled.
The group predicted a mean price of €6.70 by the end of Q1, up 35% from Tuesday, and €7.60 by year-end, as wider fundamental and macroeconomic weakness dampens prospects of a sharp rebound.
“It was interesting that when it breached €5 level we didn’t see that many stop-loss triggers … It looks like the entire market is short,” said one trader.
Cutting through the bearish outlooks, prices have now reached levels that have historically attracted buyers, according to traders Redshaw Advisers, who on Monday said EUAs could also get a temporary boost this month from once-a-year buying by smaller industrial installations ahead of their April compliance deadline.
Meanwhile, German power prices also fell considerably on Tuesday, with the next-year baseload contract down 64 cents to €21.30/MWh.
The changes to German clean dark spreads along the curve were mixed as a stronger euro amplified drops in dollar-denominated coal for European utilities.
Secondary EUA prices were little changed around the EU auction, which cleared two cents above market and recorded bid coverage roughly in line with the year’s average at 2.22.
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The 2016 price crash means lawmakers will tackle their third EU ETS reform bill in five years with prices below €8, following Backloading in 2013 and the MSR in 2015.
Members of the EU Parliament’s environment committee meet next Thursday for their first hearing on the EU ETS reform proposal, which covers changes for the 2021-2030 period.
Environmental campaigners urged politicians to implement more aggressive reforms to drive prices up towards levels capable of incentivising emission reductions.
“Major reform is now needed for the EU ETS to have any relevance,” Sandbag tweeted, with WWF’s Sam van den Plas urging lawmakers to cancel the current ETS surplus, which stands at around 2 billion allowances.
Energy Aspects analysts suggested that the low price could push the debate towards a deepening of the EU ETS cap beyond the proposed annual reduction of 2.2% next decade.
“The policy levers available in the review are fairly limited … As such, the debate could well turn to further deepening the cap, even if now seems a difficult time to politically make such a change,” Energy Aspects wrote in a weekly note.
“This might even reopen calls to start the MSR even earlier, although again this would face considerable opposition from some EU member states, and it would be considerable effort for what would amount to only ‘maybe’ getting it started one year early.”
By Ben Garside – ben@carbon-pulse.com
