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Carbon market prices decline in EU and USA

Carbon market prices decline in EU and USA

In Bulgaria, the first quarter of 2020 marked stable sales revenues generated from emission (from installations) allowances (EUA) amounting to EUR 110.2 M. This figure is 5.9% higher than the one reported for the same period of 2019. The reason for growth is the larger allowance quantity (+3.5%) traded within the time span referred, and the prices rising over EUR 20/t CO2 from the beginning of this year up to mid-March.

In the second half of March, the European market was influenced strongly by the constraints imposed by COVID-19 spread. The majority of European economies are in a ‘national lockdown’ mode in order to delay spread of infection. Several EU enterprises closed down operations, in full or in part, including in the steel industry, which in turn resonated in emission demand. The EUA auction scheduled for 17th March was cancelled because the total volume of tenders did not exceed allowances foreseen for the purpose. This allowance quantity was distributed and traded in the next 4 auctions conducted in March.

Significant drop in carbon market prices in EU and USA

January to mid-March emission allowance prices ranged between EUR 22.65 and EUR 25.60/t CO2. A substantial reduction in price by over EUR 5/t CO2 was observed in the last two weeks of March as a result of the measures undertaken to contain COVID-19 spread mentioned above and the suspended industrial production in EU countries. The lowest aution price in the first quarter was EUR 14.60/t reached on 23th March 2020. A price below EUR 15/t CO2 was registered last on 2nd July 2018 (EUR 14.95/t CO2).

In USA, at the California Carbon Allowances (CCA), emissions were traded below the floor price for the first time in about three years. On March 23rd 2020 the price went down to USD 11.97 for a metric ton of CO2 showing a 30.8% decline against the price a week earlier (USD 17.31) at ICE platform because of reduced CO2 emission demand. At the same time, in the background of limited production and emission drop, companies clear out the allowances purchased in order to meet money flow requirements which accelerates emission price descend further.

Forecast for emission market development and the need of reforms

EU ETS is a principal tool to incentivize low-carbon economy and is subject to reviewing in line with the more ambitious EU Green Deal objectives that remain to be reconsidered and approved. In view of low-carbon development, actions undertaken and declared by many EU Member States, including coal-fired power plants phasing-out, an excess of emission allowances is to be expected in the coming years.

In the background of falling allowance demand, COVID-19 implications on ETS-covered installations should also be considered. According to ICIS initial forecast (link) power generation from gas-fired power plants will drop by 17.4%, from fossil fuel – by 12.8% and from lignite coal – by 6.5%. As a result, emissions in the European energy sector will decrease by 12.7% which equals 87.6 M tonnes. Emissions from metallurgy and cement sectors are also expected to diminish. Total emission reduction in ETS is foreseen to be 388.8 M tonnes CO2. Decline in emissions will lead to fall in allowance demand thus pressing prices downwards.

Even before COVID-19 spread in the EU, European institutions had initiated discussions on EU ETS reforms, in particular on measures to raise the linear reduction factor (LRF), to grant more rights to the Market Stability Reserve to intervene, to introduce allowance price floor and ceiling, and allow for emission write-offs by Member States on voluntary basis, etc.

At the moment all eyes are focused on the Market Stability Reserve (MSR) to intervene in the emission market. Since the beginning of 2019 MSR has been absorbing excess allowances off the market which is the main reason for EUR 25 price by March 16th 2020. However, MSR was designed to handle past oversupply accumulated over the years. It will continue to absorb allowance excess and write-off allowance but at a later time since currently it is not fit for purpose to deal with current or future surplus (linked to e.g. the Covid-19, economic and financial downturn, forthcoming coal plant closures…).

Taking into account the current volatile situation on the market, the European Commission will most likely speed up ETS reforms if carbon emission prices fail to recover in medium term.

Emission allowance revenues – an important element in EWRC pricing policy

Emission allowance revenues are also an important tool to stimulate low-carbon development in Bulgaria. All revenues (100%; by June 2016 – 77%) gained from auctioning greenhouse emission allowances allocated to Republic of Bulgaria are deposited in the Energy System Security Fund and are used to reduce the ‘obligation to society’ price. In determining the prices in the electricity sector, the Energy Regulator (Decision C-19/1 July 2019) projected emission allowance revenues to reach BGN 861.450 M (EUR 440 M) for the period 1 July 2019-30 June 2020. Receivables for the period July 2019 – March 2020 have gone over BGN 654 M or 76% from the amounts anticipated. According to EEX calendar, in the next three months Bulgaria is expected to sell over 4.5 M emission allowances. To meet EWRC forecast, the average price in next three months should be around EUR 23.4/t CO2 which is rather doubtful given ICIS projection about emission allowance price drop by EUR 3/t CO2 per quarter.

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