Analysts cut EU carbon price forecasts as coronavirus causes demand slump

LONDON (Reuters) – Analysts have sharply cut forecasts for the price of European Union carbon permits for 2020 to 2022 as measures to limit the spread of the novel coronavirus have led to a slump in industrial output and power consumption, reducing permit demand.

FILE PHOTO: A coal-fired power plant is partially covered by morning fog, next to the town of Megalopoli, Greece, March 11, 2020. REUTERS/Alkis Konstantinidis

EU Allowances (EUAs) are expected to average 18.42 euros/tonne in Q2 2020 and 21.92 euros over 2020, according to a survey of six analysts conducted by Reuters, a 31% and 32% drop respectively compared with forecasts given in January.

The European Emissions Trading System (ETS) charges power plants and factories for each tonne of carbon dioxide they emit.

“Since the beginning of the COVID-19 pandemic, the current short-run outlook has turned sour compared to our initial expectations at the beginning of the year,” said Ben Evans, a market analyst at ClearBlue Markets.

“The ongoing lockdowns in Europe have already shown significant reductions in power use and industrial production across the bloc,” he said.

Even if restrictions begin to be lifted the impact on demand is likely to continue and could curb price rises in 2021 and 2022.

“It is clear that the income destruction happening now will be a legacy drag on economic growth, with GDP reductions in 2020 only likely to be partially offset by recovery in 2021,” Trevor Sikorksi, an analyst at Energy Aspects said.

Average prices were forecast at 33.01 euros/tonne for 2021, down 9.4% on the previous forecast.

For 2022 the average price forecast fell by 24.3% to 28.56 euros/tonne.

Although to a lesser extent than previously forecast, prices are expected to increase from 2021 due to the market stability reserve (MSR), a mechanism designed to remove surplus permits from the market each year.

“Today’s situation will thus only be reflected in terms of additional absorption by the MSR from 2021,” analysts at Refintiv said.

“We estimate the MSR will soak up a total of 1.2 billion tonnes worth of EUAs over the years 2021-2023. This is an additional 225 million tonnes compared to our previous estimate,” the Refinitv analysts said.

Reporting By Susanna Twidale; editing by David Evans

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