Companies face a seven-fold increase in EU ETS compliance costs over the next five years as reforms to tighten up the market take effect, according to carbon advisory firm Redshaw Advisors.

By 2020, around 60% of regulated companies will need to buy EUAs or offsets to comply, a huge shift compared to the two-thirds of firms that earlier this decade had a free surplus, according to Louis Redshaw, founder of Redshaw Advisors, speaking at the Argus European Emissions Markets conference in Amsterdam.

“In the past companies that are long (on carbon allowances) have sold their surplus or done nothing. All that is set to be completely turned on its head,” Redshaw said.

He added that a factory with annual emissions of around 50,000 tonnes would have received their entire EUA requirement for free in 2012 but will face a shortage of as much as 15,000 tonnes/year by 2020.

Under that scenario, the plant’s cost of compliance would be around €50,000 this year, but could increase by a factor of five by 2020, or grow seven-fold if lawmakers agree to install the MSR in 2017/2018, he said.

Redshaw said this was due to the market becoming shorter due to the Cross-Sectoral Reduction Factor, which slashes free allocations to industry, and potentially tougher MSR amendments that would prevent any additional EUA reserves from being sold.

Analysts expect carbon prices to be roughly double from current levels of around €7 if the MSR is in place by then, but Redshaw said this upward trend could accelerate as more ETS companies facing permit shortfalls look to enter the market.

“Companies can’t afford to be passive. It’s not an option if you are going to be short,” he said, referring to a recent survey by analysts Energy Aspects that found up to 41% of ETS companies are aiming to have a stockpile of 12 months worth of carbon units by 2020.

By Ben Garside – ben@carbon-pulse.com