Analysts cut EU carbon price forecasts on weak economies, increased supply

By Susanna Twidale

LONDON (Reuters) - Analysts have lowered their average price forecasts for EU carbon permits for the next two years on expectations weak economies across Europe could see lower industrial output and as the European Commission readies an increase in permit supply.

EU Allowances (EUAs) are expected to average 78.70 euros ($76.70) a tonne in 2023 and 92.43 euros in 2024, a Reuters survey of seven analysts showed. That is down 19.4% and 9.3% respectively from forecasts made in July.

The European Union's Emissions Trading System (ETS), forces manufacturers, power companies and airlines to pay for each tonne of carbon dioxide they emit as part of Europe's efforts to meet its climate targets.

European gas and electricity prices have hit record highs this year following Russia's invasion of Ukraine, leading to reduced output from some energy intensive industries which are also buyers of carbon permits and raised the risk some may re-locate altogether to cheaper jurisdictions.

"The upside for EUA prices is limited as industrial demand destruction remains a significant bearish factor, accompanied by geopolitical instability and recession fears," said Clear Blue analyst Goda Aglinskaite.

Analysts said the prospect of increased permit sales also led to a reduction in price forecasts.

As part of its "REpowerEU" plan launched in May the European Commission plans to sell an increased amount of allowances over the next few years to help raise 20 billion euros to help fund its transition away from reliance on Russian fossil fuels.

"The additional EUA sales under REPowerEU currently under discussion are the reasons why we now forecast an average 2023 price of 70 euros/tonne, down 10 euros from our (earlier) forecast without the REPowerEU sales," said Refinitiv analyst Yan Qin.

For 2025 the analysts forecast an average price of 101.61 euros a tonne with Europe's economies expected to recover and a significant price rise needed to spur investment in technology to enable the bloc to meet its target of reducing emissions by 55% by 2030 compared with 1990 levels.

"The price levels at which these can be implemented will to a large extent decide the price of industrial abatement and hence the price of EUAs in the years leading up to 2030," said Qin.

($1 = 1.0261 euros)

(Reporting By Susanna Twidale; editing by David Evans)