Impact of unallocated allowances on future EUA prices negligible -analysts

Published 16:57 on June 18, 2015  /  Last updated at 16:57 on June 18, 2015  /  EMEA, EU ETS  /  No Comments

The fate of an estimated 700 million unallocated allowances left over from the current phase of the EU ETS will have a negligible effect on post-2020 EUA prices, analysts said on Thursday.

The fate of an estimated 700 million unallocated allowances left over from the current phase of the EU ETS will have a negligible effect on post-2020 EUA prices, analysts said on Thursday.

Despite the issue being one of the main sticking points during recent MSR negotiations, analysts at Thomson Reuters Point Carbon said under the most bearish and bullish scenarios average EUA prices would vary by only €3.50 at most during Phase 4 (2021-2030).

Unallocated EUAs are those that, in the ETS’ current third trading phase, go unauctioned by EU governments, those returned or unclaimed by mothballed or closed installations in the ETS, and those not given out for free to new entrants to the scheme, to industrial manufacturers, or to utilities in poorer member states.

Analysts covering the EU carbon market predict they will amount to between 500 million and 900 million tonnes by 2020.

Under rules agreed last month by EU lawmakers, all unallocated EUAs will be placed in the MSR at the end of Phase 3 (2013-2020), but what happens next is unknown.

Lawmakers asked the European Commission to propose a fate for the allowances as part of this summer’s revision of the ETS Directive. Initial proposals could see a portion of the allowances sold to raise money to help industries innovate or guard against carbon leakage.

700 MILLION

In a webinar held on Thursday afternoon, Point Carbon analysts predicted that out of their estimated total of 700 million unallocated EUAs, half will be sold in Phase 4 and half will remain in the MSR.

This will help achieve an average front-year EUA price (in real 2014 terms) of €25 in 2026 and of €30 in 2030, they added. (See the table below for Point Carbon’s updated EUA price forecasts)

However, selling them all into the market would dampen prices by an average €1.50 over the decade, while keeping them all in the MSR would lift prices by €2 at most during the same period.

“When comparing these scenarios the decision on unallocated allowances matters, but the range of uncertainty is much more limited,” said Point Carbon’s Marcus Ferdinand.

The MSR, which will start in Jan. 2019, is being brought in to address a permit oversupply that was estimated at more than 2 billion units in 2014.

The analysts predicted that factors including backloading, the MSR, a diminishing ETS emissions cap, and general economic growth across the EU would help erode this glut to 1.3 billion by 2019, and to below 500 million by 2030.

The MSR is due to get a final nod from the European Parliament early next month, in a plenary vote that the analysts said is highly likely to go smoothly.

PRICE FORECASTS

The Point Carbon analysts said they adjusted their EUA price forecasts at the end of May, taking into account everything agreed by lawmakers during MSR negotiations earlier that month.

Below is a table of their latest estimates for average front-year EUA futures prices, all in real 2014 terms.

Year Price
2015 €7.80
2016 €11.00
2017 €13.00
2018 €14.00
2019 €14.00
2020 €15.00
2021 €17.00
2022 €19.00
2023 €20.00
2024 €22.00
2025 €24.00
2026 €25.00
2027 €26.00
2028 €28.00
2029 €29.00
2030 €30.00

By Mike Szabo – mike@carbon-pulse.com

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