Record high oil prices and a lower-than-anticipated supply of international carbon credits mean carbon allowances will trade at €32 on average during the second phase of the European Union's cap-and-trade scheme, according to Point Carbon, the leading provider of market intelligence, news, analysis, forecasting and advisory services for the energy and environmental markets.
According to the analysis, which appears in Point Carbon’s most recent
Carbon Market Brief, published on 10 June, the spike in oil prices, currently at record levels, have driven up the price of natural gas, which in turn has prompted power generators to burn coal and buy carbon allowances instead.
"We see €32/tonne as a fair price for phase 2 European Union Allowances (EUAs), up €2/t from our previous assessment of March this year. We see a higher CO2 forecast due to a widening of the gas-to-coal price differential”, explained Kjersti Ulset, Manager of Point Carbon’s EU ETS team.
The current gas-to-coal price differential, which is also known as the fuel switching level, measures how much it costs for a power producer to use natural gas as fuel instead of using coal and buying more carbon credits.
“Although fuel switching levels are currently at a record high, the carbon price so far in 2008 has incentivized power generators to burn natural gas rather than coal”, said Kjersti Ulset. “As a result, we have seen internal abatement," she added.
The report estimates that emissions in the power and heat sector in the European Union’s Emissions Trading Scheme (EU ETS) have been cut by 20 million tonnes (mt) as a result of carbon prices so far in 2008.
Mild and wet weather conditions have also contributed to 24 mt fewer tonnes of emissions than average weather conditions would produce. Meanwhile, in terms of the offset market, Point Carbon's analysis suggests that 2.372 billion offset credits from the
Kyoto mechanisms would be issued up to and including the first quarter of 2013, a fall of 158 million credits since the last update.
"If credits are not available at the start of the period, ETS participants will have to borrow from their next year’s EUA allocation if they are to cover the annual shortage. Or the EUA price will have to go higher than our current forecast in order to incentivise further abatement," the report said, adding that some companies would allow for such borrowing while some participants in the emissions trading scheme would refrain.
The analysis concluded that prices of December 2008 allowances in the ETS would average €25 for the rest of this year.
