As EU Carbon Prices Soar – Has the EU ETS Finally Found its Teeth?

EU ETS Carbon prices are around 20 Eur as of today, slightly off from their recent high of around 25 Eur in August. After several years in which the EU ETS was flooded with permits and prices were very low, prices are up around 300% over a 12-month period. Driving the rise in prices for carbon is the European Union plan that CO2 certificates which were not sold at auctions, will be transferred into a so called Market Stability Reserve (MSR) starting in January 2019, in order to make the market more resistant to turbulences. The EU aims to take 24 percent of certificates in circulation out of the market between 2019 and 2023, thus seeking to reduce the past oversupply of carbon allowances. The impact of this is seen by many to drive prices higher still in the next few years with predictions of around 30 Eur by 2020. However, prices have been fairly volatile recently as a combination of mild weather and a broader markets sell off has had an impact. The entry of more speculators as well as utilities hedging in advance of the January 2019 date has helped fuel prices higher over the last few months.

For the EU ETs to be effective, it has to trigger a coal to gas-fired generation movement but as the price of European gas has also moved upwards, that magic number has not yet been reached. Some analysts feel the EU ETS may be in line for a Q4 correction while others are very bullish about price prospects. Either way, for the scheme to find teeth in curbing carbon emissions, the price of carbon has to drive that move away from coal to gas-fired generation – to date, it has been ineffective in doing so.

With 1.6 billion allowances in the market, the prospects of it ever being effective are pretty low but the MSR will strip out a lot of the excess allowances afterJanuary leaving certain generators in the position of staying below their carbon cap or paying a 100 Eur/Tonne fine. A further factor to consider is that a hard BREXIT will mean that the UK is no longer a part of the scheme come March 29th next year adding uncertainty. Despite that, the cost of carbon will impact power prices in those European locations still heavily dependent on coal and lignite like Germany, for example.

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Attitudes across Europe from National Governments is also interesting. Whereas Poland is preparing to compensate its domestic industry for rising EUA prices and will again request that Brussels intervene in the market because they believe the conditions for action have been met, the Danish government is to cancel EUA allowances issued through the EU ETS as a means of contributing towards its long-term climate goals, according to Environmental Finance .

It does however seem that the EU ETS is set to become a factor again in European energy markets having an impact on prices, fuel switching, hedging and risk management strategies going forward.

 

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