Record lows for carbon prices could return by autumn

The UK government today successfully completed its latest auction of emission allowances under the European Emissions Trading Scheme, raising more than €58m (£50m) with 4.2 million allowances selling at €13.83 a ton.

The auction marked a significant improvement on the previous auction in March, which saw €43.9m raised with four million allowances sold at €10.98 a tonne.

However, at least one analyst warned the recent rally in prices could prove short-lived, warning that prices could slump back towards record lows later in the year as demand for EU Allowances (EUAs) dries up among energy firms.

The price of EUAs has rallied in recent months from a record low of about €8 earlier this year to about €14 currently – a rise in prices reflected in the government's auction.

But Alessandro Vitelli, director of strategy and intelligence at analyst IDEAcarbon, warned that while the rapid completion of the auction suggested there was still a widely held belief that the market will be long during its current period, the recent rally in prices was likely to be short-lived.

"The utilities are buying EUAs at the moment to cover their hedging activities as they sell forward power for the next few years," he explained. " But the season for that only lasts from Easter to the end of the summer and you have to ask where the demand will come from when it is over."

Vitelli predicted that while some demand would come from heavy emitters buying EUAs to cover the emissions in line with the rules of the ETS, the fact that emissions have fallen significantly in line with cuts in production means demand will be far lower than it stands at the moment.

"Steel production in Germany has halved and while people are talking about green shoots of recovery, they tend to be in countries such as China," he observed. "Once the hedging season is over, demand for EUAs will fall and we could see the market re-examining the €8 low."

KarlMagnus Maribu, senior analyst at Point Carbon, agreed prices would drop in the autumn, but he predicted that they would show signs of recovery again before the end of the year. "We think they will come back up before the year's end as the recovery begins to materialise," he said. "We are already seeing some signs of improvement in the real economy and as they begin to affect production, demand for EUAs will begin to recover – it won't be huge, but we expect to see something before the end of the year."

Vitelli's comments come as Point Carbon painted a more upbeat long-term picture for the market with a new report predicting the price of EUAs could hit €40 a tonne by 2016.

The study analyses the likely impact of the EU making good on its pledge to increase its emission reduction targets to 30 per cent by 2020 in the event that a meaningful international climate change deal is agreed at talks in Copenhagen later this year.

Maribu said the fact that the US has become an "active and constructive participant" in the international climate negotiations means that it is "now more likely that the EU will adopt a 30 per cent reduction target".

According to Point Carbon's modelling, such a target would require the EU to tighten the emissions cap under the ETS, forcing up prices from a range of €35 per ton to €65 per ton by 2016.

However, the report also notes that any attempt to link the ETS with a US cap-and-trade scheme, as is widely anticipated, would force down prices to between €10 and €30 a tonne by 2016 as a result of expanded crediting mechanisms and a larger import limit.