EU carbon allowance prices rallied to a three-month high June 18 as the market eyed planned reforms that are likely to tighten supply in the long run as well as on supportive, technical factors.
EU Allowance futures contracts for December 2020 delivery on the ICE Futures Europe exchange rallied as high as Eur24.15/mt ($26.66/mt) June 18, up from Eur22.75/mt at the close June 17, and setting the highest intra-day price since March 10.
Carbon prices appeared to react to media reports this week quoting a European Commission official saying that the commission would consider setting a price floor for carbon allowances under the EU Emissions Trading System.
"The planned legal changes keep the compliance entities worried about the availability of enough allowances," energy analyst Bernadett Papp at Vertis Environmental Finance said.
Many changes to the system are already in effect, including the Market Stability Reserve, or start taking effect next year such as a steeper decline in the carbon cap from 2021 to 2030, lower free allocation of allowances, and no borrowing of allowances in 2021 to meet calendar 2020 compliance obligations, she said.
"But there is a lot of talk about further changes as well, like the review of the MSR regulation could bring an extended period for the higher intake rate [reducing the supply available to the market], the carbon border adjustment mechanism could eliminate the carbon leakage list and therefore also the free allocation to industrials," she said.
"And the Commission looking into the possibility of a carbon floor price is a huge change in the approach and communication, because until now the Commission did not want to intervene in the price," she said.
"All the above keep the compliance entities under pressure," said Papp.
Technical factors also appeared to exert a bullish influence, with prices testing and then rising above the 200-day moving average in mid-June, which stood at Eur23.23/mt June 17.
"I think it is logical to assume that when the price broke above the 200 dma today, many stop-loss orders got triggered and short positions were closed automatically. Breaking above a significant resistance level might have invited buyers to purchase allowances before the price increases further," Papp said.
Jeff Berman, director of clean energy and emissions at S&P Global Platts Analytics said significant uncertainty remains over any adoption of a carbon floor price, which would represent a fundamental change in how Europe's carbon market operates.
"Implementing a price floor would represent the most dramatic shift in the commission's EU ETS policy ever," Berman said.
"Even making this suggestion publicly would be remarkable. I can't help but think that this is tied to other suggestions that the commission siphon off EUA auction revenue to pay for its coronavirus relief package, as discussed in our June 11 EU ETS Monthly Outlook, as it would open up the commission to EUA price exposure," he said.
"Trading off this development seems unjustified until there is a sense of the level of a price floor the commission deems acceptable. A market with a Eur10/mt floor is quite a bit different to one with a Eur50/mt floor," he said.
"Any future efforts to set a possible floor will be deeply contentious, and would be a process that the commission has sought to avoid for 15 years. I don't envision France and Poland seeing eye to eye on this," he said.
Any adoption of a reform as drastic as a minimum price for carbon allowances would first need to be proposed by the EC before gaining the backing of the EU Parliament as well as majority support among EU member states, not to mention the difficulty in finding agreement between countries on what the minimum price should be.
No change on carbon price floor: EC
A European Commission official said no decisions had been made on whether to propose minimum carbon prices under the EU ETS.
"Our views haven't changed on the ongoing debate about the pros and cons of a carbon price floor," said an EC spokeswoman who asked not to be named, in an emailed statement June 18.
"The first review of the Market Stability Reserve, scheduled for 2021, will allow us to take stock of whether any further measures are needed to maintain a strong carbon price signal," she said.
"Our current priority is to examine whether and how we can extend the ETS to other sectors. The ETS emissions cap, reduced annually, continues to deliver emissions reductions and sets out a trajectory for emissions reduction until 2030 and beyond," the spokeswoman said.
"The environmental ambition of the ETS is guaranteed by the emissions cap, and not by the level of the carbon price. We would also recall that the annual emission reductions under the ETS in 2019, which we published recently, were at their highest level in over a decade," she said.
