Point Carbon analysts warn EUAs still vulnerable to shocks, cut forecasts again

Published 19:26 on March 1, 2016  /  Last updated at 19:28 on March 1, 2016  /  EMEA, EU ETS  /  No Comments

EU carbon prices are only likely to slowly recover from the sharp falls of the past two months, but will remain vulnerable to shocks throughout the next decade because the MSR will have a limited calming effect, analysts at Thomson Reuters Point Carbon said on Tuesday.

EU carbon prices are only likely to slowly recover from the sharp falls of the past two months, but will remain vulnerable to shocks throughout the next decade because the MSR will have a limited calming effect, analysts at Thomson Reuters Point Carbon said on Tuesday.

The analysts expect EUAs to average €6.60 this year, €10 in 2020 and €33 in 2030 in nominal terms, they said in an emailed report, updating their modelling after the shock 44% plunge in EUA prices over the first six weeks of the year.

The projections represent a substantial drop on their previous forecasts, which were included in Carbon Pulse’s Feb. poll as an end-2016 projection of €8.90, and €15.30 by the end of 2020.

The analysts’ new end-2016 forecast represents a 32% increase on today’s settlement price of €5.00 for the benchmark Dec-16 EUA futures contract.

“We expect the shaken market confidence to result in a slow price recovery from current lows,” said Marcus Ferdinand, head of EU carbon analysis at Thomson Reuters Point Carbon.

“Based on our model and on the expectation that traders will want to take profit on the recent price drop, we expect a recovery in the price later this year,” the report added.

EUA prices fell from €8.29 at the end of 2015 to as low as €4.62 on Feb. 17 on what most commentators assessed to be combination of speculative short-selling, utilities unwinding some of their hedged positions, and some industrial selling.

This huge downturn followed a year of relatively stable price increases that translated into an 11% annual gain.

VULNERABLE

Far from being a one-off, the Point Carbon analysts said the EU ETS is likely to be vulnerable to such shocks for years to come.

“Until there is a balance between supply and demand of carbon permits, the EU carbon price remains very vulnerable to sentiment swings like the one that fuelled the price crash of early 2016,” said Point Carbon’s Emil Dimantchev.

The analysts do not foresee the ETS losing its surplus and reaching supply-demand balance until 2034 under their base case scenario, which assumes the currently-proposed 2030 EU headline targets of a 40% emission cut, and 27% renewables deployment and energy efficiency improvement.

The report explored 15 other possible future price paths, including measuring deeper EU 2030 renewables and energy efficiency goals, a British exit from the EU, as well as accelerated coal power phase-outs in the Germany, Netherlands and the UK.

The European Commission expects that the MSR will help protect the EU ETS from such external factors, but Point Carbon analysts said the market will remain vulnerable even after the mechanism is activated in 2019.

“As designed, the MSR fails to deliver a stable carbon price outlook,” said Point Carbon’s Ferdinand, explaining that the reserve’s ability to withdraw a maximum of 12% of excess EUAs a year would be insufficient to withstand some effects.

“This relatively low annual withdrawal rate can only buffer a fraction of emission reductions resulting from overlapping policies.”

Price outlook 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
EUA price (nominal) 6.6 7.3 8.5 9 10 12 14 16 17 19 20 21 24 28 33
EUA price (real ‘15 euros) 6.5 7.1 8.1 9 10 11 12 14 15 16 17 18 19 22 26

By Ben Garside – ben@carbon-pulse.com

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