In the past couple of weeks, Europe’s carbon price has undergone drastic change and is currently trading between €16 per metric ton and €18 per metric ton.
Prices have dropped up to €9 per metric ton, a reduction of 40% since early March when prices were trading at about €24 per metric ton.
The current trading levels are roughly two thirds of the level of the high of 2019 of €29 per metric ton.
IHS Markit believes there are three drivers of the price collapse:
* Severely weakening fundamentals: Reduced economic activity, power demand, and aviation demand will lead to lower 2020 emissions across Europe.
* Weakening oil prices brought on by an unprecedented fall in global oil demand at a time when current production is outpacing global storage capacity.
* Bearish financial markets with increased margin calls are reducing noncompliance capital invested in the ETS.
“This is a perfect storm for Europe’s carbon market, and it may well lead to some challenging questions about its role in Europe’s decarbonisation strategy once the Covid-19 crisis has passed,” says Coralie Laurencin, director of IHS Markit.
The researcher adds that the Market Stability Reserve (MSR) could bring the market back into balance in 2021. The MSR removes 24% of excess annually, which amounts to 400-million metric tons this year. Of the newly accumulated excess created by Covid-19 in 2021, the MSR will also remove 24%.
Depending on the severity and extent of power demand impacts going forward, the IHS Markit outlook for EU ETS prices ranges from an average of €12.6 per metric during second quarter-fourth quarter 2020 (in the reference case) to as low as a €5 per metric ton average over the same period (stress case).