Big Story 10

Analysts trim EU carbon price forecasts as supply swells

LONDON (Reuters) - Analysts have trimmed their forecasts for European carbon prices in the bloc’s Emission Trading System (ETS), as government auctions of permits swell supplies and curb prices.

Analysts shaved their forecasts for the next three years by 0.03-0.14 euro and now expect EU Allowances (EUA) to average 5.25 euros per tonne in 2017, 5.67 euros/tonne in 2018, and 7.12 euros/tonne in 2019, according to the poll of eight analysts published on Monday.

In October analysts had forecast prices of 5.39 euros for 2017, 5.70 euros for 2018 and 7.12 euros for 2019.

Benchmark EUAs currently trade around 5.05 euros, and analysts said prices are likely to remain muted in 2017 due to an increase in supply from government auctions.

The EU ETS regulates around half of Europe’s output of heat-trapping gases, forcing more than 11,000 power plants, factories and airlines surrender a carbon allowance for every tonne of carbon dioxide they emit.

In an effort to boost prices and curb the oversupply of allowances a total of 900 million EUAs were being gradually withheld from government auctions from 2014 to 2016 in a process called backloading.

From 2017 the auctions return to normal, meaning 200 million more allowances will be auctioned compared with 2016.

From 2019 supply in the market will be cut as permits are removed under a Market Stability Reserve (MSR).

At 9.80 euros/tonne, Nomisma Energia analyst Matteo Mazzoni has the most bullish forecast for 2019. He said this assumes the adoption of plans proposed by the European Parliament’s Environment Committee to double the MSR permit withdrawal rate compared with the European Commission’s original proposal.

ICIS Tschach Solutions analyst Philipp Ruff, who has the most bearish forecast for 2019 of 5.30 euros, said his forecast was based on the Commission’s original MSR proposal being adopted.

The Environment Committee proposal will go to a plenary vote in February. The EU member states, the Commission and Parliament will then start talks to thrash out a final market reform deal, including how many permits the MSR should withdraw.

Editing by Greg Mahlich