Investors must watch for EU carbon pricing boom, warns Carbon Tracker

Investors are being warned to take note of the ballooning European carbon price, as Carbon Tracker predicts it could average €40 per tonne within five years – with big implications for the profitability of the region’s energy intensive industries.

Allowances under the EU Emissions Trading System (ETS) have more than tripled in price over the past 15 months, shooting up from €4.38 p/t last May to €18.28 this month.
In the latest Carbon Tracker report, Mark Lewis, former Head of European Utilities at Barclays, says growth looks set to continue, forecasting €25 p/t by the end of the year and averages of €35-40 p/t over 2019 and 2023.

The dramatic increase has been caused largely by long-awaited changes to the EU ETS recently, which will see a ‘Mark Stability Reserve’ introduced in January. The MSR is a mechanism which allows allowances to be removed and added to the system, based on supply and demand. It will cancel 24% of the current 1.7bn-tonne surplus each year until 2023, and 12% thereafter, in a bid to deal with the glut that has decimated European carbon prices in recent years.

“The price has already moved more than 300% since last spring, and that’s because there’s been some anticipation of the supply squeeze coming from the introduction of the MSR,” Lewis told RI. “But commodities work on physical flows, and the physical flows will start to dry up from January, so that’s when you’d expect to see the market really move.”This hike in carbon price may trigger ‘fuel-switching’ – mainly when companies and countries decide it is more financially viable to move to gas than to retain coal production.

“If you’re invested in the European utilities sector in Europe – or any energy intensive industry – you need to be keeping an eye on carbon prices over the coming 12-18 months, because they will increasingly dictate their profitability,” concluded Lewis.

Lewis released his first report on the topic for Carbon Tracker in April, but in his latest research he revises his predictions upwards. Ultimately, he expects emissions from fixed installations to drop 2.7% annually from 2021 to 2030 – 50% fast than previous estimates.

Lewis was a member of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD) until he joined Carbon Tracker earlier this year, which required him to resign from the taskforce because it doesn’t allow NGO representatives.

Meanwhile, Carbon Tracker is among the groups that is putting pressure on IOSCO, the International Organisation of Securities Commissions, on climate change disclosure.

A new report reveals that investors with a global portfolio suffer due to what’s termed “regulatory divergence” between countries in terms of climate risk disclosure and corporate governance practice. Other bodies backing the report include Legal & General Investment Management, law firm ClientEarth and campaign group WWF.