The failure of the EU to meet its 2020 renewable energy targets could see EU allowance (EUA) prices hitting €70 ($93) by that date, according to consultancy ICF International. And wholesale power prices in the bloc are set to double over 2010-20, ICF predicted in its latest European Power & Carbon Markets Outlook report.
The consultancy modeled likely EU emissions, abatement cost curves, policy developments and the supply of carbon credits from outside the EU to come up with a variety of scenarios.
The high EUA price scenario is based upon the EU accepting a target of reducing emissions 30% below 1990 levels by 2020 – which it has pledged to do if a successor international agreement to the Kyoto Protocol is struck. ICF believes: “While a satisfactory agreement … may not be reached in December 2009 as originally planned, it will be in the following months.”
Neil Cornelius, head of energy market analysis for Europe at the US-headquartered firm, told Carbon Finance that if the EU misses its 2020 renewable energy targets – of sourcing 20% of its energy from renewables – the carbon price could be expected to rise dramatically, as more expensive reductions would be needed to compensate for the lower percentage of carbon-free electricity. He declined to provide detailed numbers.
Another key factor will be the extent to which emitters and speculators ‘bank’ carbon allowances from the current phase of the EU Emissions Trading Scheme (ETS), which runs to the end of 2012, into the 2013–20 phase, where carbon caps will be tighter and EUAs presumably more expensive.
“There is likely to be a more significant degree of banking than we appear to be seeing at the moment,” Cornelius said. Lingering uncertainty about the future regulatory shape of the EU ETS and a tough economic environment are discouraging the holding of allowances for future use – indeed, some emitters are believed to be selling allowances to raise cash. “As these factors change, the pricing relationship [between allowances now and for use in Phase III] will change.”
“EU ETS participants should look beyond the current economic and credit crisis and adopt a long-term carbon market strategy that anticipates a sharp rise in demand for emission reductions over the next five years,” added Diane Simiu, carbon analyst. “Anyone going for the ‘dash-for-cash’ approach is in for a rude awakening when the carbon market picks up.”
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