- EUA prices dropped over the last month, with some of the supportive developments from early in September becoming less supportive as time passed. Instead, the market focussed on the bearish fundamentals on the demand side—emissions reductions from plenty of coal-to-gas switch and very weak industrial production data. In the background, Brexit developments kept adding uncertainty and a no-deal Brexit is still not completely off of the table.
- Among all of the bearishness, the market did see more supportive news as European Commission President-elect Ursula von der Leyen set out her legislative goal to deliver a European Green Deal. Chief amongst the many facets of that vision is the goal to get Europe to commit to being carbon-neutral by 2050, with an accompanying strengthening of the bloc’s 2030 target from a 40% to a 55% decrease in emissions on 1990 levels. The first test for this new green legislative slate will be to get Poland, Hungary and Czechia to agree to the 2050 carbon-neutrality goal. While such an agreement is targeted for an EU Council summit in December, much will depend on convincing the three countries holding out that sufficient financial resources will be made available to areas that will be particularly affected by the required energy transition. Failure to get an agreement at the December summit will limit what can be achieved in the new Commission’s first 100 days.
- If the 2050 goal can be agreed at Council level—unanimity is required on this—then legislation should follow that will strengthen the EU-wide 2030 emissions reduction target, and then one that will specifically lower the EU ETS cap. In a move long resisted by the Commission, legislative proposals will likely follow on carbon border tariffs, which look both difficult to formulate and possibly hard to get agreed. One thing is clear, though—from 1 November policy development will return as a key price driver in the EUA market.
- Before we get to that point though, the 31 October Brexit deadline still has to be negotiated. With only two weeks to go until that deadline is reached, all options are still possible including: the UK leaving with a deal, the UK leaving without a deal and the UK asking for an extension. While the UK’s parliament has made it more likely the UK government asks for an extension if it does not have a deal, that does not mean the EU will immediately grant that extension. For the EU to grant an extension, it will need to feel there has been progress towards a deal, and it is unclear if that is the case. As far as the UK prime minister is concerned, the UK will exit on 31 October with or without a deal.
- So, the market is still shouldering plenty of Brexit risk and this will limit any price upside. If there is a no-deal Brexit, expect the market to fall, with prices below 20 €/t a real possibility.
- For 2020, many of the dynamics that we have seen in the carbon market in 2019 will continue to apply. Low supply, driven by another big 400 Mt downward adjustment due to the MSR, will be supportive, although some EUA supply will be added back in as Poland and possibly the UK will have more allowances to auction. The demand side looks to still be muted. A second year of loose EU gas markets beckons, which will continue to deliver emissions reductions through coal-to-gas fuel switching, while the outlook for European industrial production is at its lowest since 2012. Given the opposing supply and demand pressures, and assuming a no-deal Brexit is avoided, we expect plenty of in-range trading for 2020, with the market gradually moving to higher trading ranges as we go through time, with prices over 30 €/t during H2 20.