Analysts have raised their average price forecasts for EU carbon permits for the next three years after the EU gave green light to the bloc’s carbon market reforms, but warned prices could remain volatile along with swings in European energy costs.
EU Allowances (EUAs) are expected to average 86.17 euros a tonne in 2023 and 96.19 euros in 2024, a Reuters survey of seven analysts showed. That is an increase of 5.9% and 2.2% respectively from forecasts made in January.
The forecast for average prices in 2025 rose by 2.5% to 104.84 euros per tonne.
Under the European Union's Emissions Trading System (ETS), manufacturers, power companies and airlines are required to pay for each tonne of carbon dioxide they emit as part of Europe's efforts to meet its climate targets.
On April 25, the European Council approved key legislative elements of the Fit for 55 package, which include an overhaul of the EU's Emissions Trading System, the introduction of a carbon border tax, and the launch of a social climate fund.
That meant those key parts of climate legislation have finally cleared the lawmaking stage and will now be published in the EU Official Journal and enter into force 20 days later.
The move came more than four months after negotiators agreed to reform the EU's ETS, increasing carbon cutting ambitions to 2030, detailing the removal of free allowances and confirming the inclusion of maritime shipping and a new ETS II for buildings and road transport.
“The bullish impact of the final agreement on ETS reform and compliance demand in the first quarter has injected strong momentum and significantly boosted market prices,” said Yan Qin, Refinitiv's lead carbon analyst.
"We maintain our view that the EUA price will continue to rise in the coming years as market participants prepare for tighter balances," she said.
Europe’s volatile energy markets would likely have a big impact on demand and prices for EUA, Qin and other analysts warned.
European gas and electricity prices have fallen back from record highs seen last year following Russia's invasion of Ukraine as Europe built up large gas reserves and milder than usual weather dented demand, but gas prices still remain high historically.
“We believe that the (carbon) market will continue to follow the energy complex,” said Goda Aglinskaite, analyst at Clearblue Markets.
He said some industrial firms, which are also buyers of carbon permits, paused production due to high gas prices last year and had still to decide when to restart.
"Many industrials remain hesitant to restart and are waiting for additional developments in the gas prices...Thus, the (permit) demand from industrial side, remains limited too," he said.