LONDON - Analysts have increased their forecasts for prices in Europe's carbon market to 2021 as supply cuts begin to bite, but warned that short-term prices will be volatile due to uncertainty about Britain's departure from the European Union.
EU Allowances (EUAs) are expected to average 27.00 euros/tonne in 2019 and 32.83 euros/tonne in 2020, according to a survey of seven analysts polled by Reuters.
The forecasts were up 17.3 percent and 21.8 percent, respectively, from prices given in October, when the projections were for 23.01 euros in 2019 and 26.96 euros in 2020.[L8N1WJ1FY]
Analysts increased their forecasts for 2021 to an average of 27.26 euros/tonne, up 4.4 percent.
The European Emission Trading System (ETS) charges power plants and factories for every tonne of carbon dioxide they emit.
Prices trebled last year, with utilities increasing hedging ahead of supply cuts coming into effect from 2019 and as more speculative traders entered the market.
The ETS has suffered from excess supply since the financial crisis, but this will be addressed by new measures including the Market Stability Reserve, which from this year will remove some surplus allowances from the market.
"As 2019 is the first year of the operation of the market stability reserve (MSR), this will be still the most important factor impacting the carbon market," said Sandrine Ferrand, analyst at Engie Global Markets.
Analysts at Berenberg, who had the most bullish forecasts, said the MSR will lead to a deficit of 400 million tonnes of carbon permits in 2019.
"And this is not a one-off year – the EU ETS system has just begun a decade of deficits," said Berenberg analyst Lawson Steele.
In the shorter term however, several analysts warned that prices, now around 23.00 euros/tonne, will be volatile due to uncertainty over Britain's exit from the European Union.
British lawmakers voted on Tuesday against Prime Minister Theresa May's Brexit deal, leaving the country no clearer on its exit plan, and with the government facing a no confidence vote later on Wednesday.
"If the UK ends up leaving the EU without a deal on 29 March, it will discontinue its participation in the EU ETS," analysts at Refinitiv said.
"Such outcome would be overall bearish for EUA prices in the short term as UK installations could be expected to offload their surplus allowances and unwind hedges," the analysts said.