Isra-Mart srl:EU carbon price to rise 49 per cent next year

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The price of a tonne of carbon in the EU's emissions trading scheme (ETS) will rise by around 50 per cent next year as energy companies attempt to hoard carbon credits ahead of the launch of the next phase of the scheme in 2013.

That is the conclusion of the latest forecast from analysts firm Point Carbon, which predicts the price of EU allowances (EUAs) will rise from €14.78 currently to an average price for next year of €22 a tonne.

The report also predicts the price will then rise again in 2012 to €25 a tonne before the third phase of the ETS kicks off in 2013 and prices begin to rise steadily as a result of the tightening emissions cap imposed by Brussels. Point Carbon predicts that by the end of the next phase of the scheme in 2020 the average carbon price will reach €36 a tonne.

Speaking to BusinessGreen, report author and head of European carbon analysis at the company, Kjersti Ulset, said the price spike next year would be primarily driven by increased demand from the energy sector as a result of the economic recovery and, more significantly, utilities establishing hedging positions for the next phase of the ETS.

"We will see quite a large a large increase in the price next year," she said. "The main driver will be the demand side as the power sector continues to hedge for phase 3 when they will have to buy EUAs at auction."

However, Ulset acknowledged that the price projections were based on a set of assumptions and the market was likely to continue to experience considerable price volatility over the next two years.

For example, industrial firms covered by the scheme are believed to be holding up to one gigatonne worth of excess EUAs as a result of reduced emissions during the recession. Point Carbon predicts 60 per cent of this surplus will be rolled over into the next phase of the scheme, but if companies choose to sell a larger proportion of their credits it will lead to an increased supply of EUAs and force the price down.

Similarly, it is not yet known when governments will choose to release the reserve EUAs they hold or the 300m credits that are earmarked for sale to help fund carbon capture and storage (CCS) projects.

"The exact timing of when this supply will come to market is still uncertain and that makes the 2012 price correspondingly challenging to predict," admitted senior analyst and report co-author Anne Kat Brevik.

The projected €36 price for 2020 could also be lowered if the EU fails to increase its over-arching emission reduction target for 2020 from 20 per cent to 25 per cent, as anticipated by Point Carbon.

The price projections still fall well short of the €50 to €80 a tonne level that analysts believe will be necessary to drive investment in low carbon technologies such as renewable energy and CCS without recourse to additional subsidies.

But Ulset said the rising price of carbon would strengthen the investment case for low carbon projects that can also access other incentive schemes, while continuing to accelerate the shift away from coal power and towards cleaner gas-fired power plants.