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Market News

 November 03, 2009
Copenhagen wrangling leads to downgraded carbon price

 Report predicts that recession, coupled with failure to deliver a strong deal at Copenhagen, will result in a lower-than-expected carbon price.

The potential impact on low-carbon investments of failing to deliver a meaningful deal at the forthcoming Copenhagen Summit was underlined last week with the news that analyst firm Point Carbon is downgrading its long-term price forecasts, primarily as a result of growing uncertainty at the prospects of an international climate change deal being reached.

The analysts' EU ETS Scenarios to 2020 report said that the combination of lower-than-expected emissions over the past 18 months as a result of recession, and the reduced likelihood of binding emissions targets being agreed as part of any Copenhagen Treaty, meant the price of EU emission allowances (EUAs) would be lower than anticipated between 2013 and 2020.

It predicted that the average price for EUAs during the third phase of the emissions trading scheme (ETS) would reach €37 per metric tonne of CO2, down €3 a tonne on the previous forecast issued in May this year. It also downgraded its price forecast for 2013 from €30 to €28 per tonne.

The analyst firm said the downgrades were the result of both the recession, which has left many industrial emitters holding excess EUAs (which they are now expected to roll over into the next phase of the scheme), and the reduced likelihood of the EU triggering its conditional offer to cut emissions 30 per cent by 2020, as part of any Copenhagen agreement. The EU has said it will sign up to more ambitious emission-reduction targets, but only if other industrialised nations do likewise -- a scenario that looks increasingly unlikely given the US's failure to pass a climate bill ahead of the Copenhagen talks.

"We have re-run the emissions and price models, and have made new assessments for the different political outcomes," said Kjersti Ulset, head of European carbon analysis at Point Carbon. "The large difference between EU and US positions in the negotiations reduce the likelihood of a satisfactory agreement -- from the EU's point of view. This makes it harder for the European Union to agree to a 30 per cent reduction target, leaving a target in the 20-30 per cent range increasingly likely."

The report predicted that were the EU to commit to a 30 per cent emissions reduction, the price of EUAs between 2013 and 2020 would rise to between €30 and €60 per tonne. However, if it sticks with the 20 per cent goal, then the price of EUAs would fall into the €20 to €40 a tonne range.

The news will come as a major blow to EU efforts to promote investment in low-carbon technologies. Governments have argued that the price on carbon delivered by the ETS will drive investment in low-carbon technologies such as wind energy, nuclear power, and carbon capture and storage systems by making them more cost-effective than coal and gas. However, according to experts the carbon price will have to reach between €50 and €80 a tonne to drive the widespread adoption of low-carbon technologies.

The prospect of a long-term carbon price of under €40 a tonne is likely to fuel further speculation that governments, including the UK, may intervene in the ETS market to drive up the price of carbon and better incentivise low-carbon investments.