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EU carbon dioxide allowance prices slide ahead of talks on 2030 targets

London (Platts)--13 Jun 2018 526 am EDT/926 GMT


EU carbon dioxide allowance prices fell for a third straight day Tuesday, ahead of Wednesday's three-way talks on 2030 energy efficiency and renewable energy targets that could spur additional CO2 reductions in Europe, cutting demand for allowances.


  • EU seeking to agree energy efficiency, RES targets
  • Raised ambition would prompt additional CO2 cuts
  • Stability reserve to mitigate risk of extreme price moves

EU Allowance futures contracts for December 2018 delivery on the ICE Futures Europe exchange fell as low as Eur14.97/mt ($17.64/mt) Tuesday from Eur16.00/mt at the close on June 7 and from a seven-year intra-day high of Eur16.70/mt on June 5.

The price weakness came ahead of Wednesday's trilogue talks -- three-way negotiations between the EU Parliament, Council and European Commission -- in which the EU institutions are aiming to strike a compromise agreement on raising the ambition on 2030 targets for energy efficiency and renewable energy.

"The interactions of various policies are certainly a concern, especially given that the initial EUA price collapse in mid-2011 was triggered by a draft Energy Efficiency Directive that did not adjust EUA supply," said Jeff Berman, director of emissions and clean energy at S&P Global Platts Analytics.

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"While the EC has stated their belief that the MSR [Market Stability Reserve] will be able to adjust EUA supply to account for other policies, their own modelling has suggested that there would be a negative impact on EUA prices from higher renewables and efficiency targets," he said.

"The MSR is better equipped to handle longer-term market re-adjustments than shorter-term disruptions. There could be some EUA price volatility resulting from the agreement of higher renewables and efficiency targets as the market digests both higher headline targets for 2030, as well as how those targets will be interpreted for implementation," said Berman.

The MSR was agreed in 2017, came into force this year and will begin operating in January, removing 24% of the cumulative surplus of carbon allowances each year until it falls below 833 million mt. The surplus was 1.655 billion mt in 2017, according to EC figures updated in May.

Other market sources agreed that ramping up the EU's 2030 targets could weigh on carbon prices, although the market is now better protected than in previous years.

The market remembers the 2011 price collapse, when EUA prices fell from Eur18/mt to Eur10/mt in a matter of months, said Espen Andreassen, a senior carbon and energy analyst with Norway and Germany-based analysis company Wattsight.

"That was partly driven by an ambitious energy efficiency long-term target. Still, with regards to the [2030] energy efficiency and renewable targets, I am not expecting that to be of much importance for the market price nowadays," he said.

"Although the market prices are not as short-term focused as they have been over the last years, 2030 is simply too far ahead," he said.

"Another thing is the extent to which targets are respected, as many major EU ETS countries are clearly on a path to fail reaching their 2020 targets," Andreassen said.

"We still perceive the MSR, being very strong and only seven months away, to have been the major driver this winter and spring. Also coal-to-gas fuel switching prices have increased tremendously since early February [driven partly by higher natural gas prices], and have hence contributed to price growth," he said.

Higher gas prices since winter have helped to maintain coal's profitability in the electricity mix in Europe, propping up forward hedging demand for EUAs.

Additional short-term factors could contribute to a bearish outlook for carbon prices, Andreassen said, pointing to higher hydro-electric power output in Europe, fewer problems with nuclear generators this year than in 2017, and rising volume of EUAs to be sold at auctions in June and July, at 91 million mt and 94 million mt, respectively, compared with 68.4 million mt in May.

In Wednesday's trilogue talks, the parliament and council may strike a compromise in which the 2030 renewable energy target could be raised from 27% to 30-31% or 32-33%, and the energy efficiency target raised from 30% to 32%, based on recent discussions.

There is also a risk that further talks need to be scheduled if no compromise can be reached this week, before Bulgaria hands over the six-month rotating EU presidency to Austria on July 1.

The parliament has been pushing for higher levels of ambition on both 2030 targets, while Germany's energy minister has warned that any higher targets must be affordable.

Overall, the revised 2030 targets appear to hold the potential to stymie the recent rally on carbon prices, which hit a seven-year high in June, and even trigger a further downside move for carbon.

But another carbon price crash back into euro single digits looks very unlikely, given the moderating effect of the MSR, whose purpose is to adjust supply each year in order to future-proof the EU ETS from the negative effects of overlapping policies as well as future demand side shocks.

--Frank Watson, frank.watson@spglobal.com
--Edited by Jeremy Lovell, newsdesk@spglobal.com




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