Analysts at Thomson Reuters Point Carbon have increased their EUA price forecasts to 2020 as a lower-than-expected free allocation for industry next decade means more factories will opt to hoard their surplus units.
The Oslo-based analysts increased their forecasts by one euro over 2017-2020 compared to their previous April projections after the European Commission’s post-2020 ETS review proposed giving fewer free allowances to industry than they had been expecting.
They now expect front-year EUA futures prices, expressed in nominal terms, to average €14.30 in 2017, €16.40 in 2018, €17.30 in 2019 and €18.30 in 2020.
The analysts had previously predicted that the Commission would propose allocating 350 million unallocated EUAs from the current trading phase to compensate for indirect carbon costs to industry, which are those passed on through electricity prices.
Instead, the Commission proposal opted to merely transfer them to a different pot that would only be allocated to new or expanded industrial capacity or production.
This, coupled with the Commission’s decision to fix the amount of allowances to be auctioned at 57%, means industry will receive 261 million fewer EUAs than the Point Carbon analysts had previously expected over 2021-2030.
Read our analysis for more on the effects of the ETS proposal on industrial sectors
“We expect (this lower allocation) to affect the willingness of industrials to sell allowances and to act as the marginal source of supply of allowances for the market,” they said in a report seen by Carbon Pulse.
“The cap placed on industrial free allocation in Phase 4 sends a strong signal to manufacturers, which may encourage more and more of them to plan for the long term and save the allowances they have on their books for the future,” they added.
The analysts said the bullish effect of this will be slightly offset by the proposal’s higher-than-expected Phase 4 auctioning volume, which would lower forecasted prices slightly in the late 2020s.
The EU ETS is currently massively oversupplied by around 2.2 billion EUAs, meaning analysts currently assess carbon prices by estimating the rate at which factories to sell their surplus units, rather than predicting emissions levels.
By Ben Garside – ben@carbon-pulse.com
