analyst Ingvild Sorhus . “ The EU ETS is finally making a real difference . And for those that aren ’ t yet seeing immediate abatement opportunities , there is a greater awareness that these will come in time .”
Most analysts point to the implementation of the market stability reserve ( MSR ) as the key to carbon ’ s price recovery , as well as its renewed relevance in Europe . The MSR , which began operation in January 2019 , was designed to mop up the permit surplus by adjusting the supply of allowances to be auctioned . Following the 2007-08 financial crisis , the EUA surplus had swelled to more than 2bn by the end of 2013 – more than the verified emissions of the 12,000 power plants and manufacturing installations taking part in the ETS that year .
According to Lawson Steele of Berenberg Bank , the MSR has gone a long way towards fixing the fundamental oversupply that plagued the market during its third phase , from 2013 to 2020 . “ The MSR has given the system the teeth it lacked for 15 years ,” Steele says . “ I ’ m confident that the system is already delivering abatement – coal is switching off and in countries like Spain gas can take up the entire load after closure of coal plants .”
“ It ’ s clear that carbon pricing is one of the tools that the EU has and will use to make meaningful and economic progress towards net-zero ,” says Dave Jones , an analyst at Sandbag , an environmental think tank . “ That wasn ’ t so clear a few years ago . Of course , there is huge uncertainty whether the market will be improved to keep prices slowly rising , or whether continued volatility to very high or low prices will undermine that meaningful and economic progress .” The EU ETS is now a mature market because it is achieving the goals that it was set by the EU , Jones adds . “ It ’ s definitely impacting [ the power sector ]. On fuel switching , gas is running fairly consistently ahead of hard coal ,” Jones says . “ It has erased profitability from lignite plants , levelling the playing field towards investment in clean energy , so it should help speed the transition in that sense .”
However , some also point out that gas-fired power will eventually need to be forced off the grid in order to achieve the EU ’ s net zero goals . “ As supply of emission allowances becomes tighter , the potential for short-term emission reduction via fuel switching in the power sector is becoming increasingly limited ,” Icis analysts wrote in a report published in late January .
Even more critical observers such as Carbon Market Watch , an NGO that tracks the success of emissions markets , concede that the EU ETS is doing its job . “ The higher EU ETS price signal is a reflection of
steps which have been taken to address the massive historic oversupply of emission allowances on the market [ through the establishment of the MSR ],” says the group ’ s policy director , Sam van den Plas . “ In addition , the EU commitment to move to climate neutrality by 2050 will impact market scarcity further , since it implies improving the 2030 climate target and thus the ETS cap will be lowered .’
But van den Plas notes that the impact of EU ETS reform has so far been felt almost entirely by the power sector . “ For industrial sectors like steel , cement and chemicals the numerous exemptions and free pollution permits included in the legislation have failed to make the ETS an effective tool to drive down emissions ,” he says . “ Carbon pollution from heavy industry has hardly decreased since 2012 and is not predicted to do so until 2030 . The upcoming EU ETS review should abolish the practice of handing out free emission allowances and move to full auctioning combined with innovative clean technology support for energy-intensive industries instead .”
Berenberg ’ s Steele also reckons that industrial emissions abatement has yet to begin in earnest . “ Industry will abate , but the cost of carbon borne by industrials will need to be high enough . It may not yet be enough for them to worry about .” Industrial installations will receive around 75 % of their total emissions in the form of free EUAs this year , Steele says , and that share will continue to decline over the coming decade . “ Prices need to rise further and stay there so that they are not viewed as an aberration ,” he adds . “ Then industry will react .”
“ For industry , free allocations will continue to undermine the effectiveness [ of the EU ETS ], but clearly high prices will provide an incentive to move to reduce emissions ,” says Sandbag ’ s Jones . Even as carbon prices test new territory , the bloc is preparing to implement reforms to make the ETS even stronger . Levels are expected to rise even further in the coming years , analysts say .
In October last year , analysts predicted European carbon prices could reach EUR 50 / t by 2023 as the EU carries out reforms to the MSR , the linear reduction factor ( the annual cut in the overall cap ) and other elements of the scheme . With allowance supply tightening further towards 2030 , some analysts , including Refinitiv ’ s Sorhus , reckon prices could reach as high as EUR 80 / t by 2029 . In the shorter term , experts predict an average price for EUAs in 2021 of EUR 38.36 / t , according to a Montel survey carried out in January , with some forecasting as high as EUR 65 / t . n
Montel Magazine 1 – 2021