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Carbon market provides boost for coal in EU

World Coal,

The EU’s emissions trading scheme (ETS) is likely to remain oversupplied with allowances until the end of the next decade, according to new analysis from Thomson Reuters Point Carbon, resulting in a prolonged period of low carbon prices.

Despite moves to strengthen the ETS, Thomson Reuters Point Carbon expects the accumulated oversupply in the market – expected to be some 2.5 billion t in 2020 – to keep the market in surplus to 2027.

Strengthening the ETS will provide little short-term impact…

The European Commission is expected to present proposals for a 2030 energy and climate framework by the end of this year. A key element of this discussion will be whether reforms to strengthen the ETS should be made to put the EU on the road to its long-term ambition of reducing carbon emissions by at least 80% by 2015. But even with such reforms, carbon prices will remain in single-digit levels, averaging € 7.7/t in the period up to 2020, notes Stig Schjølset, head of carbon analysis at Thomson Reuters Point Carbon.

Moreover, the recent proposal to “backload” emissions allowances is unlikely to have an impact on long-term carbon prices, adds Schjølset: “Backloading, which now seems likely to be implemented, will not have any impact on the long-term carbon price in Europe. Even though a decision to remove 900 million allowances from the auction volume in 2014 – 16 would give some support to prices in these years, we expect prices to drop off again from 2019 when the backloaded volume is scheduled to return to the market. In 2020 we expect the [carbon] price to average € 5/t due to the steep increase in the auctioning volume.”

… but will raise the carbon price in the long term

From 2021, the situation does start to change with the ETS will be short on allowances on an annual basis – but it will take until 2027 to work through the accumulated oversupply. After that, Thomson Reuters Point Carbon expects the carbon price to rise to € 66/t in 2030.

The long-term price forecast is based on the assumption that the EU will take on a target to reduce greenhouse gas emissions by 40% by 2030, that there will be no access to international offsets in the 2021 – 30 period and that the share of renewables in the final energy consumption will increase to 30% by the end of the next decade.

 “A price forecast out to 2030 will of course come with a lot of uncertainties and our sensitivity analysis suggests that significant changes to the macroeconomic outlook would have the largest impact on the carbon price. If GDP growth were 1% higher every year compared to our base case, we expect [carbon] prices of € 96/t in 2030; while an analogous 1% lower annual GDP growth would result in a price of € 21/t in 2030, explains Schjølset.

A boon for Europe’s coal industry?

How might this affect Europe’s coal consumption, which is currently undergoing something of a renaissance. Speaking to World Coal, Yan Qin, senior analyst at Thomson Reuters Point Carbon, comments: “We project that the switching prices from coal- to gas-fired generation would remain well above EU carbon prices until 2030. Therefore, the sustained low carbon prices will further boost coal-fired power generation in the EU in the coming years and the dominating role of coal in the fuel mix of major EU countries, including Germany, Poland and the UK.” 

In the long-term, a prolonged period of low carbon prices could provide a change in investment decisions, encouraging power companies to put more money into coal-fired power plants: “Low carbon prices could potentially affect investment decisions by large utilities since investments in coal power plants could turn out to be more profitable now with the current long-term carbon price forecast, compared with several years ago The potential shift in investments in the EU power system would inevitably have impacts on European coal demand in the future years.”

Edited from various sources by Jonathan Rowland

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