UK ups EU CO2 price forecasts used in policy, warns on long-term carbon target

Published 23:51 on November 18, 2015  /  Last updated at 10:28 on November 19, 2015  /  EMEA, EU ETS

The UK has raised the EU carbon price forecasts that it uses in public policy by as much as 27%, the country's Department of Energy and Climate Change said in a report published Wednesday.

The UK has raised the EU carbon price forecasts that it uses in public policy by as much as 27%, the country’s Department of Energy and Climate Change said in a report published Wednesday.

DECC calculates “short-term traded carbon values”, which range from the current year to 2030, to value the impact of government policies on emissions in those sectors covered by the EU ETS.

It reported its central and high price scenarios for 2016 as £5.91 and £23.40 respectively, up 27% and 19% from the values released a year ago.

DECC’s high price scenario climbs rapidly to £39.03 by 2020, £78.35 by 2025, and £117.68 by 2030.

Its central price scenario, on the other hand, slips slightly to £5.89 in 2017, before creeping up to £6.59 by 2020. It then doubles to £13.78 in 2021, before jumping to £42.52 in 2025 and £78.45 by 2030.

Larger increases were made to the values in the earlier years compared to the changes recorded in the post-2020 figures.

DECC reported no values for its low price scenario between 2015 and 2020. EUAs are then seen at £3.92 in 2021, before climbing to £19.61 in 2025 and £39.23 in 2030.

In comparison, front-year EUA futures on ICE settled at €8.58 (£6.08) on Wednesday.

DECC’s central scenario price estimates are calculated using a market-based approach that uses average daily settlement prices, taken over a three-month period, of the different vintages of ICE’s annual December-expiry EUA futures.

Its high price scenario is a fundamentals-based calculation that assumes “the 40% EU GHG emissions reduction target is in place in 2030 and the MSR is fully operational in 2019,” as well as higher economic growth and low coal prices relative to gas.

Its low price scenario is also based on fundamentals and uses the same assumptions regarding the bloc’s GHG target and MSR, but is calculated against slower economic growth and higher coal prices compared to gas.

DECC notes that “prices are based on a specific set of assumptions with respect to the move from the end of Phase 3 of the EU ETS (ending in 2020) to a fully functioning and comprehensive global carbon market in 2030.”

“Consequently these values should not be considered as ‘forecasts’ of future prices and DECC accepts no responsibility for any liability arising from the use of these figures.”

The table below shows how DECC’s ‘short-term traded carbon values’ have changed since its 2014 report (all figures in £, real 2015 terms)

Low (2014) Low (2015) Central (2014) Central (2015) High (2014) High (2015)
2016 0.00 0.00 4.66 5.91 19.66 23.40
2017 0.00 0.00 4.78 5.89 20.89 26.41
2018 0.00 0.00 4.97 6.12 26.72 29.86
2019 0.00 0.00 5.16 6.35 33.76 34.04
2020 0.00 0.00 5.35 6.59 39.66 39.03
2021 3.88 3.92 12.58 13.78 47.34 46.89
2025 19.42 19.61 41.51 42.52 78.08 78.35
2030 38.83 39.23 77.66 78.45 116.50 117.68



Separately, DECC wrote in another report released Wednesday the UK will miss its 2023-2027 national GHG reduction target by a wider margin than previously expected, but it predicted the country will not exceed its next two five-year carbon budgets.

The government had previously warned that it would miss its fourth carbon budget, which starts in 2023 and is set at 1.95 billion tonnes of CO2e. But DECC said that “projections for emissions have increased since the 2014 update”, and that the UK would exceed its goal by 187 MtCO2e, compared to the previous estimate of 133 million.

“Much of the change is due to methodological revisions in the land use, land use change and forestry sector (LULUCF), resulting in 44 MtCO2e out of an overall increase in emissions of 54 MtCO2e during the fourth carbon budget,” the report said.

“The other major drivers of increased emissions (accounting for 26 MtCO2e) are revisions to macroeconomic and demographic projections and, to a lesser extent, fossil fuel prices. Some of this is offset by updates to government and EU policies which reduce emissions by an additional 16 MtCO2e over the fourth carbon budget compared with their 2014 estimates.”

The UK’s carbon budgets are legally-binding limits on the total amount of CO2 and other GHGs it can emit over a five-year period, and they are geared more towards the sectors not covered by the EU ETS.

The government is currently considering how to achieve further cuts by 2027 and will set out a new plan at the end of 2016, around six months after it sets its fifth budget (for 2028-2032).

The UK overachieved by 36 MtCO2e its first carbon budget (2008-2012), which coincided with the Kyoto Protocol’s first commitment period. The country emitted 2.982 billion tonnes versus its self-imposed limit of 3.018 billion.

For its second and third carbon budgets, it has set respective targets of 2.782 billion and 2.544 billion tonnes.

By Mike Szabo –