Industry Outlook For Carbon Prices To Remain Low To 2020

Monday 3rd June 2013 The value of carbon allowances traded on the EU’s Emissions Trading System (ETS) won’t recover to pre recession levels before 2020 according to an annual survey of industry players, raising concerns about the long term impact of the UK’s carbon price floor for energy intensive businesses in the UK. The views come in an annual survey by PwC for the International Emissions Trading Association (IETA), examining views of carbon market investors, traders and advisors, who meet today at the industry’s annual conference in Barcelona. The outlook for price recovery remains weak according to members, due to the oversupply of allowances, reduced demand and policy uncertainty. EU allowances (EUAs), which traded at over €30 before the recession, are currently trading at around €3.50, and only 7% of the value of what is believed to be necessary to shift economies onto a low carbon pathway (€47). 56% of respondents expect EUAs to trade at €5-10 between now and 2020, a 47% fall from last year’s expectations for the same time period, and a 68% fall from those in 2011. With such low prices for energy intensive businesses including manufacturers and energy generators, the Carbon Price Support Mechanism was introduced to incentivise investment in low carbon power generation, through a carbon tax. But the collapse in European carbon prices since 2011 means the UK faces higher carbon prices than elsewhere in Europe. The results raise competitiveness concerns for UK businesses with carbon leakage likely if companies relocate production to other EU countries to avoid costs. Jonathan Grant, director, PwC Sustainability & Climate change, said: “With a sustained period of low prices expected for EU carbon permits, the UK’s Carbon Price Floor looks increasingly out of line with the rest of Europe, which raises concerns about the impact on UK business, when other countries in the EU don’t have a similar tax.” In the survey, members also overwhelmingly backed intervention by the European Commission to reform the EU ETS within 12 months. The Council is due to vote on proposals in June, but the survey shows members feel the proposals will not go far enough to boost values. Four out of five now feel that domestic or regional policy initiatives are likely to be more important than international negotiations over the next five years. The linking together of domestic or regional carbon markets was particularly highlighted, with 94% expecting the EU and Australian carbon markets to be linked before 2020, and 25% for both California and South Korea. The new Californian carbon market, launched at the start of the year, is expected to increase its share of the global market in terms of value, with California Carbon Allowances expected to continue trading at US$10-20 over the first three years of the programme. Jonathan Grant, director, PwC, who performed analysis on the survey, said: “Despite the collapse of carbon prices, it’s reassuring that all regulated entities surveyed said that the carbon price is still relevant to their capital investment decisions, with four out of five saying it is an important factor. “However a sustained period of low prices expected for EU carbon permits, means business looks set to face a patchwork of climate tax and regulation over the coming years which may raise concerns about competitiveness and high administrative costs.” Taylor Scott International