Carbon prices will reach double digits by 2015, says ICIS

With prices around €6.50, established energy intelligence provider ICIS Tschach predicts a sustained increase in the price of European Trading Scheme (ETS) allowances. On current trajectories, prices are expected to hit double digits and a two-year high by year’s end.

Since the beginning of the EU ETS’s Phase 3 compliance period at the start of 2013, the market has been oversupplied with allowances, leading to a sustained period of trading within a €3-6 corridor. Now however, a number of factors are converging to push prices consistently higher.

“After all the volatility and exceptional trading activity in Q1 2014, we are seeing the effects of back-loading really start to take hold now” said Philipp Ruf, Lead Analyst, EU Carbon Markets at ICIS.  “Together with the potential momentum derived from the policy discussion around the 2030 emission reduction target and the Market Stability Reserve, suggest a sustained bullish corridor for carbon prices.”

Higher carbon prices represent a business risk to all sectors where there is an emissions compliance requirement. However, the biggest effect is likely to be felt in the carbon-heavy industrial sector.

“Up to now, industrials have enjoyed a huge number of free allowances under the scheme and could easily cover their obligations and maybe even sell some allowances at a profit,” notes Jan Frommeyer, Director of Market Analysis at ICIS. “Now the free allowances are scarcer, and most carbon-heavy industrials will face a shortage of allowances in the near future. That’s not so risky with prices as low as they have been, but as they edge higher it becomes more and more of a problem.”

ICIS predicts that carbon prices will enter double digits by the start of 2015 for the first time since 2012. However, with further planned political interventions designed to keep prices high, prices of above €20 are perfectly feasible in the third trading period. Such a scenario would represent a significant risk to large industrials and an intelligent and informed hedging strategy will be vital to protect profits.