By Susanna Twidale
LONDON (Reuters) - Analysts have raised their forecasts for carbon prices in the EU Emission Trading System (ETS) to 2020 after a bullish start to the year and on expectations that plans to reform the market will significantly curb oversupply.
Analysts expect EU Allowances (EUAs) to average 18.59 euros/tonne in 2019 and 20.76 euros/tonne in 2020, according to the survey of eight analysts by Reuters published on Monday. <COMMODITYPOLL54>
The forecasts were up 34 percent and 13 percent, respectively, from prices given in April, when the forecasts were for 13.86 euros for 2019 and 18.36 euros for 2020.
Analysts also for the first time gave forecasts for 2021 which averaged 21.88 euro/tonne, almost 30 percent higher than current trading levels for the benchmark European carbon contract. <CFI2Zc1>
The European Union's Emissions Trading System (ETS) charges power plants and factories for every tonne of carbon dioxide (CO2) they emit.
The ETS has suffered from excess supply since the financial crisis, but this will be addressed by new measures starting from 2019, such as the Market Stability Reserve which will remove some of the surplus allowances from the market.
"We see the anticipation of the Market Stability Reserve curbing supply from 2019 as the fundamental driver behind the price rise," said Hege Fjellheim, Head of Carbon analysis at Thomson Reuters.
"We could also see increased buying interest from the industry on the back of compliance needs and uncertainty of the final decisions on free allocation for the fourth trading phase," she said.
Under the ETS some industries are eligible for free permits if they are deemed to be vulnerable to competition from countries with looser environmental regulations, known as "carbon leakage."
The number of sectors and companies eligible for this support will be reduced in the fourth trading phase of the scheme which runs from 2021-2030, meaning more firms will need to buy carbon allowances.
The benchmark contract has more than doubled since the beginning of the year to around 17 euros/tonne.
In the shorter-term analysts said there could be a correction from recent high prices as some market participants look to lock in profits.
"We still predict some consolidation in the last part of the year that may shake the market on the downside," said Nomisma Energia analyst Matteo Mazzoni.
(Reporting By Susanna Twidale, Editing by William Maclean)