Growing fears about the EU’s economy have prompted a new wave of downgrades of carbon price forecasts – but a prediction by UBS that prices could slump to €3 ($4.06) next year has elicited a rebuttal from a leading carbon market group.
In light of the ongoing eurozone sovereign debt woes and fears of a second, deeper, recession, analysts at Swiss bank UBS last week said that they expect EU allowance (EUA) prices to fall to €5 in 2012-13, with the possibility they may collapse to as low as €3. This, they said, is due to the financial crisis, which has created a surplus of EUAs – which will take until 2025 to disappear – and has also weakened buyers’ balance sheets.
“The carbon price has fallen by 40% since June reflecting growing oversupply,” said the UBS report. “We expect an acceleration of the decline as the primary supply of allowances, not given for free, should increase by 74-142%.” This supply boost includes looming auctions by the European Investment Bank (EIB), increased supply of certified emission reductions (CERs), sales of allowances held by governments in Phase II ‘new entrants’ reserves’ (NERs) and a flood of emission reduction units issued by Russia and Ukraine.
EUAs trading near record lows
EUA prices have continued to fall since the report’s publication, and the benchmark December 2011 futures contract was trading at €9.05 late this morning on ICE Futures Europe – slightly up from last night’s close, but still close to historic lows.
Lobby group the Climate Markets & Investment Association (CMIA) blasted the report, stating that “the headline €3 price may have overlooked a number of key issues”, such as the looming exclusion of certain types of CERs from the EU Emissions Trading System (ETS) from 2013.
December 2011 EU allowance contract, year to 21 November 2011 (Source: ICE)
Barclays Capital analyst Trevor Sikorski also argued that the €3 floor is not a reasonable price expectation. In a research note published on Monday, he said that such a low price level “would involve a massive discount to be placed on the future value of a right to emit, and that is unlikely to be in line with market participants’ expectations of future value given the ability to bank permits”.
He explained that there remains demand in the market for EUAs, particularly with most utilities no longer being given free allowances from 2013. With industrial emitters presumed to be holding the bulk of the surplus, they will only sell if the EUAs can generate much-needed cash-flow. “If the permit prices fall too low, then the incentive to keep selling reduces as the opportunity cost of holding onto the inventory begins to fall,” Sikorski said.
UBS forecast 'ignores utility hedging'
CMIA also cited analysis by Ingo Tschach of Tschach Solutions, who said that “there are some issues with the analysis ... UBS is concentrating on issues that support its thesis while giving a low weight to issues that would weaken the stated opinions.” For example, he said, UBS said that any EUA purchasing by utilities in 2012 would be due to increased power generation – ignoring the fact that energy firms employ a hedging strategy, whereby they buy the necessary fuel and emissions permits when completing forward power sales.
UBS also pointed to incoming Phase III EUAs via EIB auctions of the so-called NER 300 – as the bank has been tasked with selling 300 million EUAs from the pool for new installations joining the EU ETS from 2013 – as another bearish influence on prices. However, Sikorski pointed out that the regulations underpinning the sales have yet to be adopted – despite statements last week that they would be by 18 November – and that the longer that takes, the fewer EUAs will be sold this year. “With fewer weeks for the EIB to sell, it is more likely that we will only see 15 Mt being sold before year end. Every week of delay takes 5 Mt off of that total,” he said.
Meanwhile, Société Générale analysts on Monday said that the eurozone crisis is sending the bloc into a recession, and dropped their EUA price forecast for 2012 to €12.30, from €15.80. The bank anticipates utility buying to ramp up next year, ahead of Phase III, which starts in 2013.
“We still expect carbon prices to increase in the medium term once the financial crisis is under control. In 2012 buying pressure from utilities should push prices up. After reaching low levels at the end of 2011, momentum should turn bullish in [the first quarter of 2012] and prices should rebound, a trend that is likely to continue throughout 2012. EUA should climb back towards €15.30/t in 2013,” they said.
By. Katie Kouchakji
Source: Environmental Finance