Emissions are under-priced in Europe
Details
Analysis shows that the current price of carbon will need to rise significantly to achieve Europe's emissions goals after 2020
London, 13 September 2011 ‐‐ The price of carbon in the European Emissions Trading System (EU ETS) should be trading at three times today's levels according to new analysis by Bloomberg New Energy Finance of the long-term fundamentals in the emissions market. Looking at how the scheme will evolve up to 2020 and beyond, the price today should be €40 - 60/tCO2, compared to the current price of around €12 - 13/tCO2. By 2020 prices will need to rise to €60 to €90/tCO2.
Since the beginning of 2011 the European carbon price has traded between €10 and €19/tCO2. These low prices reflect oversupply caused by the accumulated surpluses of Phase II (2008-2012) largely created by the recession, as well as an increase in the volume of carbon credits imported from outside the EU. According to Bloomberg New Energy Finance these prices will broadly be sufficient to achieve the emission reduction targets set for the EU ETS in 2020 - and allowing for the full import quota of 1.66bn tonnes of international credits.
Between 2008 and 2020 the scheme will be in cumulative deficit of around 1,968Mt. Some 1,664Mt (85%) of this can be met by the use of international credits - the maximum allowed in the scheme up to 2020 - resulting in a net shortfall of around 300Mt over the period, equivalent to around 20Mt/yr or 1% of emissions covered by the scheme. This can be met by a small increase in the carbon price, which is currently trading at around €12/tCO2.
After 2020, however, the fundamentals of the scheme change significantly. According to the legislation, the targets will tighten beyond 2020 at the same rate as in the 2013 to 2020 period - at a 1.74% reduction in allowed emissions per year, assuming an EU-wide target of a 20% reduction by 2020 from 1990 levels. We project emissions from the power and industrial sectors will come down over time, but assuming real GDP growth of 1.8% p.a. across the EU up to 2028 the reductions will occur at a slower rate than the decline in the target, resulting in an increasing need for emission reductions. Although greater use will be made of renewable energy in the power sector, the effect on carbon emissions will be mitigated by an increase in the demand for power.
Bloomberg New Energy Finance’s analysis shows that the scheme is likely to be in deficit by around 170Mt in 2013, but that this should increase to around 380Mt in 2020 and then to 660Mt/yr in 2028. The shortfall in 2028 is more than double the average Phase III annual EUA shortage of 287Mt/yr. If no more international offsets are allowed into the scheme beyond 2020, reductions between 2020 and 2028 of around 530Mt/yr will need to be found - equivalent to 20% of projected emissions. In contrast the average deficit, excluding international offsets, over the period 2008-2020 will be around 190Mt/yr or 8% of average projected annual emissions.
At the same time, access to low-cost emission reduction measures will start to run out. Switching from coal to gas-fired generation will become progressively more expensive as the most efficient gas plants will be run at maximum load and only the less efficient plants will be left available, resulting in much higher abatement costs. Bloomberg analysis assumes a small use of carbon capture and storage on the power and industrial sectors but prices for this technology will range between €50 and €120/tCO2 - so in no way can be considered a "get out of jail for free" card.
Access to international carbon credits may also be curtailed. In the period 2008–2020, around 130Mt/yr of credits will be allowed to be imported into the scheme. Decisions on how many credits may be imported after 2020 have yet to be made, but it is possible that no further credits will be allowed. The lower price forecasts in this analysis assume 150Mt/yr of imported credits post 2020. The higher prices assume no imported credits post-2020.
The implications of these developments for carbon prices are significant. In 2024 - the mid-point of the 2020-2028 period - the cost of meeting the targets will be €100/tCO2 without access to international credits and €65/tCO2 with access to these credits. Discounted back to 2011 the prices are €64/tCO2 and €42/tCO2 respectively.
Guy Turner, director of commodity research at Bloomberg New Energy Finance, said, "At a time when everyone is talking about over-supply and bearish market pressures, it is helpful to be reminded that the European carbon market will eventually become short. When it does the cost of reducing emissions in Europe will be much higher than people think."
He adds, "To meet these higher costs, energy and industrial companies need to prepare sooner rather than later. Those companies that do plan ahead and build low-carbon assets will see the benefits in reduced operating costs compared to their rivals."
For further information:
Guy Turner
Bloomberg New Energy Finance
+44 203 216 4086
Gturner10@bloomberg.net
ABOUT THE ANALYSIS
This press release presents the public version of a detailed report on the costs of meeting emissions targets in the EU ETS up to 2028, conducted by Bloomberg New Energy Finance over the past six months. The analysis uses the Bloomberg New Energy Finance Global Energy and Emissions Model which creates a detailed analysis of near-, medium- and long-term costs of meeting climate targets in the EU ETS and Europe as a whole.
Abatement costs are modeled for each sector covered by the EU ETS including power, oil refining, cement, steel, ceramics, aviation and other small sectors. The model also creates a worldwide analysis of the demand and supply of international carbon credits that enables a complete view of how many carbon credits are available to EU ETS buyers and at what price.
The modeling and analysis conducted by Bloomberg New Energy Finance is widely used by investors, traders and governments.
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