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EU carbon price forecasts

EU Carbon Market Rebound: Will it last?

Impact of carbon prices on Europe's power market

IHS Markit examines the current carbon prices in the EU’s Emissions Trading System (ETS) with forecasts to 2030. While the EU cap-and-trade program delivers some financial consequences that are intended to curb carbon emissions by large emitters over the long term, at what point will Europe see a tipping point in carbon pricing by 2020 that makes coal too costly? What other EU power market determinants are significant?

The IHS Markit report covering the EU Carbon Price Outlook:

  • Recent bull run in the context of long-term European market fundamentals
  • EU carbon price forecasts and other influences on coal plants in the long run
  • Renewables long-term visibility for finance

Access a complimentary report. 

A recent dramatic rise in carbon pricing

Recently, the Carbon market in Europe has gone from strength to strength. Since the start of 2018, the carbon price has been on a steady surge, which has lifted it to €16 per metric ton, up from a low of under €4 in September 2016. This newfound dynamism contrasts sharply with the past few years.

Will higher carbon prices influence Europe’s power mix? Ultimately, what role can the carbon prices in EU play in the decarbonization of the power market mix?

Is this rally too much, too soon? The market is sitting on 2 billion metric tons of unused credits that are held by participants, more than the total emissions of a single year. In addition, carbon prices could face downward pressure from increasingly ambitious climate and renewable targets, such as those currently being implemented in France, Germany, and the Netherlands, which could decrease emissions levels below current expectations and, therefore, lower carbon prices in EU.

With the recent 2018 carbon price quadruple what it was in 2017, the prices last seen in 2011 could be lauded as great strides forward in the initiative to curb greenhouse gases that scientists blame for global warning. IHS Markit believes a correction will likely be needed in the long run since the carbon market in Europe will continue to be oversupplied into the 2030s.

IHS Markit analysts have closely examined three distinct phases to consider what a higher carbon price can accomplish in combination with fuel switching mandates in some European countries. An initial impact is seen when the carbon price starts to trade above €30 per metric ton and to price out low-efficiency coal plants.

For the carbon market in Europe to have a lasting impact on the power market and, more specifically, on coal capacity, a much higher carbon price is required for a sustained period. Based on IHS Markit commodity price expectations, high-efficiency coal and lignite plants will remain competitive in the long term, meaning that coal capacity is more likely to be pushed out by mandate than by market forces.

How will a higher carbon price interact with the wholesale price risk? Financing purely merchant assets, those whose revenue comes entirely from the wholesale market, remain complicated, regardless of the carbon price level.

To access our latest data and insight on EU renewable energy, please visit EU Energy Forecasts, Strategic Analysis & Insights by Fuel

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