Analysts raise EU carbon price forecasts, but downside risks remain

By Susanna Twidale

LONDON (Reuters) - Analysts have raised their average price forecasts for EU carbon permits for 2022-2024 as high gas prices lead to more use of emissions-intensive coal for power generation, but they said weaker industrial output could curb demand.

EU Allowances (EUAs) are expected to average 88.36 euros ($90.29) a tonne in 2022 and 97.66 euros in 2023, a Reuters survey of eight analysts showed. That is up 3.7% and 3.6% respectively from forecasts made in April.

Forecasts for 2024 prices increased by 4.2% to 101.96 euros/tonne.

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 prices have hit record highs this year following Russia’s invasion of Ukraine, making it more economical for some generators to burn coal, which emits twice the amount of carbon dioxide as gas-fired power plants.

“Germany, France, and some other major European economies have already declared that they will reopen previously mothballed coal plants, which will keep emissions from the power sector high,” ClearBlue analyst Atasi Bhattacharjee said.

Russia has cut the amount of gas it is sending to Europe via the Nord Stream pipeline to just 20% of capacity.

It says the reduction is because of necessary maintenance, but many European countries have said it is in retaliation to Western sanctions placed on Russia.

To prepare for further cuts EU energy ministers this week approved a proposal for all EU countries to voluntarily cut gas use by 15% in the August-March period.

This, the analysts said could lead to lower industrial output in Europe, which could cut industrial firms' demand for permits.

Refinitiv analyst Yan Qin said carbon prices have fallen since the EU plan to curb gas use was first announced on July 20.

“This could have triggered fears that more industrial production will be shut, hence some industrials might offload their surplus allowances,” she said.

The benchmark European contract was trading around 78.30 euros a tonne at 1000 GMT, down almost 8% since July 20.

($1 = 0.9787 euros)

(Reporting By Susanna Twidale; editing by Barbara Lewis)