Analysts forecast short-term dip in EU carbon prices after bull run

LONDON, April 12 (Reuters) - Analysts have cut their forecasts for the prices of European Union carbon permits for 2019 and expect a short-term correction following a strong start to the year.

EU Allowances (EUAs) are expected to average 24.31 euros/tonne this year and 32.21 euros/tonne in 2020, according to a survey of eight analysts polled by Reuters.

The forecasts were down 10 percent and 1.9 percent, respectively, from prices given in January, when the projections were for 27.00 euros in 2019 and 32.83 euros in 2020.

The European Emissions Trading System (ETS) charges power plants and factories for every tonne of carbon dioxide they emit.

Prices trebled last year as utilities increased hedging ahead of supply cuts coming into effect from 2019.

Prices have continued to rise this year, hitting a near 11-year high over 27.00 euros a tonne.

Several analysts, however, said a correction could be on the cards, with average forecasts for the second quarter of this year at 22.89 euros a tonne.

Analysts at Refinitiv said much of the recent rally in prices was due to Britain’s negotiation of an extension in its plans to leave the European Union.

“The carbon market has already priced in a large extent of the Brexit optimism as seen in the steep price rise lately, limiting further the upside,” they wrote.

Under a no-deal scenario Britain would automatically leave the European scheme, leading to expectations of a sell-off by British firms holding EU carbon permits they no longer need.

Britain is the second-largest emitter of greenhouse gasses in Europe, after Germany, and its utilities and industry are among the largest buyers of permits in the EU ETS.

“A downward correction is likely in the short term, as the market has been overbought in the past sessions,” said Sandrine Ferrand, analyst at Engie Global Markets.

Over the longer term, analysts said prices would rise due to the market stability reserve (MSR), a mechanism implemented from this year to remove surplus permits.

European Commission data shows emissions covered by the ETS excluding aviation fell 4.2 percent last year.

Lower emissions mean companies need to buy fewer permits and a larger surplus of credits to be removed by the mechanism in following years.

“The MSR will withdraw probably more EUAs than expected from 2020 and 2021 auctions, which creates a more bullish impact,” Ferrand said.

Reporting by Susanna Twidale; Editing by Dale Hudson