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Analysts predict upwards path for carbon prices in 2010

06 January, 2010

Carbon prices will be weak in January and February as industrial emitters sell surplus EU allowances (EUAs) from 2009, analysts predict. But EUA prices could rise as high as €20 ($29) per tonne (t) of carbon dioxide equivalent later in the year, they say.

A seasonal pattern has emerged in the EU’s relatively young carbon market, leading bank analysts told Carbon Finance. The beginning of the calendar year sees industrial firms covered by the EU Emissions Trading Scheme (ETS) tallying up their verified emissions for the previous year, then selling some or all of their surplus from their free allocation of EUAs.

Last year, the poor economic climate, which hit production levels and short-term cash flows, put an extra pressure on many industrial emitters to cash in EUAs – rather than bank them in case of future shortages – and depressed prices to as low as €8/t. Analysts expect a repeat of the seasonal selling and a dip in prices, estimating prices will fall to around €10.00-11.50/t, from around €12.45 today.

Despite the “continuing weak economic outlook”, likely to dampen carbon prices, Mark Lewis, analyst at Deutsche Bank, said for industrial emitters “the liquidity crisis isn’t so acute this year”, so they will be under less pressure to cash in any surplus EUAs.

In addition, industrial firms may want to wait until their position in Phase III of the EU ETS becomes more certain.

The 2013-2020 phase will see most EUAs auctioned, rather than allocated for free. A final list of which sectors will be given free allowances was published recently, determined by which sectors the EU decides are at risk of carbon leakage – whereby production and carbon emissions shift to a region with no or lower carbon restrictions. But this may be revised at the end of June, when the Commission will send a report to the European Parliament and Council, which could include proposals to adjust provisions to address carbon leakage.

Later in 2010, prices are expected to rise, as electricity generators – which will see free allowances end in 2013, except for in eastern Europe – begin to sell power forward for 2013. Typically, generators ‘hedge’ their carbon exposure on forward electricity sales. But, with Phase III allowances not yet available to buy, generators will need to cover the shortfall with Phase II allowances, increasing demand.

But the impact of this is still uncertain. Emmanuel Fages, Société Générale and Orbeo analyst, said it is difficult to estimate the likely volume of these EUA purchases by generators, but estimates around 10% of power may be sold three years ahead, largely by German generators. The effect will be more pronounced in 2011, analysts told Carbon Finance, as more generators sell power two years ahead of delivery.

Trevor Sikorski at Barclays Capital said: “We have been forecasting higher prices for the whole year ... about €15 for the rest of [this] year.”

Fages said he expects prices to rise to around €14-15/t at the end of the first quarter of 2010, then continue on an upwards trajectory to around €17-18/t. “If we finish the year around €20, I wouldn’t be surprised,” he added.

Prices for certified emission reductions (CERs) from Clean Development Mechanism projects are expected to follow the same pattern as EUAs, analysts said. Lewis at Deutsche Bank predicted: “CERs will probably track EUAs for [lack of] any better reference.”

Fages said CERs would start the year at around €9.00-9.50, “below, but not much below” EUA prices, but with the spread in prices between the two carbon commodities widening during the year until CERs are around €2-3 cheaper than EUAs.

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