Oslo, 2 December 2011

The average EU Allowance (EUA) price in the third phase of the EU’s Emissions Trading Scheme (EU ETS) will be €12/t, predicts Thomson Reuters Point Carbon, the leading provider of market intelligence, news, analysis, forecasting and advisory services for the energy and environmental markets. The most depressed price levels will probably be seen in the 2013- 2015 period when the average price of EUAs could drop to as little as €10/t before rising again in the 2018-2020 period, reaching €16/t in 2020 on the basis of a tightening supply-demand balance.

The €12/t figure is €10/t less than Thomson Reuters Point Carbon’s July 2011 forecast and barely more than a third of the forecast issued this time last year.

“The main reason for this drastic change is the global economic crisis which has multiple impacts on the global carbon market”, explains Anne Kat Brevik, Commercial Manager at Thomson Reuters Point Carbon. “Not only do we see industrial output and associated emissions down - we predict by some 700 Mt for the period up to 2020 - but also we see governments recoiling from taking tougher climate action in the wake of domestic economic hardship”. Just four months ago it seemed likely that the EU would adopt a 25% emissions reduction target for 2020, “however, the new forecast is now based on a 20% emissions reduction scenario, which we consider a more realistic outcome given today’s severe sovereign debt crisis in the EU, resulting in the market being long in EUAs in the third phase”, she said.

However, any final decision on the overall emissions reduction target will likely not be taken before the start of phase 3, and the option to agree on a 25% target will most likely remain on the table for the next few years.

According to Marcus Ferdinand, Senior Carbon Analyst at Thomson Reuters Point Carbon, “despite these very gloomy predictions, we do not expect prices to deteriorate further in the short term, partly because the power and heat sector still needs to buy credits on a continuous basis in order to back-up their future power sales and partly because as long as a possible move beyond a 20% target still exists, we assume that this inherent uncertainty will deter the industry sector from selling off their entire length. As the emissions trading scheme continues beyond 2020, with a steadily decreasing allocation, operators can also bank allowances to meet future compliance needs instead of selling off the surplus at low prices in the short term”.

That said, if the current debt crisis does lead to financial markets drying up, pronounced industrial selling would likely ensue as industrial installations attempt to monetize their EUA length in order to boost cash flow. “If such a situation should materialize, we could see a further substantial drop in EUA prices”, Ferdinand conceded.

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