MSR won’t drive EU carbon prices higher -think tank

Published 17:55 on May 29, 2015  /  Last updated at 23:00 on May 29, 2015  / Ben Garside /  EMEA, EU ETS

The MSR will continue to have limited impact on the EU ETS so long as the prospect remains of the mechanism releasing allowances back into the market, a think tank said on Friday.

The MSR will have limited impact on the EUA prices so long it allows any permits to be released back into the market, a think tank said on Friday.

In a report from non-partisan European Policy Centre on Friday, senior energy and environment advisor Jørgen Knud Henningsen said other options besides the MSR would be needed to fix the EU ETS, otherwise low prices were likely to continue for the next 5-10 years.

The report’s findings suggest that any allowances absorbed into the MSR be cancelled rather than await re-entry into the market once the number in circulation drops below the current 400 million threshold.

Although EUA prices have remained flat since the MSR text was agree earlier this month, market analysts expect them to gradually rise to as much as three times current levels by 2020 as supply is constrained.

Key comments from the report:

“The recent agreement between negotiators from Parliament and Council to move the MSR forward to the 1st January 2019 had virtually no impact on CO2 prices, which seems to indicate a weak market response to the MSR idea.

“This is not surprising as long as allowances set aside in the reserve are foreseen to be released as ‘liquid’ when market liquidity falls below a certain level.

“It is hard to see why anybody should pay high prices as long as there are still abundant allowances in stock.

“Unless something is done to ‘physically’ eliminate a major part of the surplus, the ETS is likely to continue its present life of lack of impact on EU’s CO2 emissions, for most, if not all, of the period until 2030.”