(Montel) Emissions captured by Europe’s carbon trading scheme are likely to record their steepest plunge in a decade this year due to slowing economic activity and fuel switching, according to analysis firm Wattsight.
“We saw the industrial development during this summer being exceptionally weak and EU economic growth concerns expressed in the beginning of this year appear to have materialised,” he said.
Manufacturing in Europe’s biggest economy was “firmly in contraction” at the start of the final quarter of 2019, according to an IHS Markit purchasing managers index published on Monday.
“The German manufacturing sector remains in recession and continues to pose a threat to the domestic economy through a rising number of factory job losses,” said the company’s principal economist Phil Smith after the sector’s PMI recorded its second-lowest reading since June 2009.
Economies around the world have been slowing on the back of escalating trade disputes involving rising tariffs on goods flowing between the US, China and Europe.
Wattsight expected European power demand to fall 2% this year owing largely to the decline in industrial activity.
Gas displaces coal
In addition, a combination of abundant cheap gas and elevated carbon prices has this year frequently made the cleaner fuel more competitive than coal for power generation. Coal’s displacement has produced an attendant drop in demand for carbon allowances.
The trend looked set to continue into next year, according to Wattsight.
Coupled with a need to upgrade coal plants to comply with tighter EU environmental rules, many utilities were choosing to close their most emissions-intensive generation assets.
“We observe that many announcements of very early closures of hard coal/lignite power plants in western and southern Europe have emerged in the last 12 months,” Andreassen said.
“Weak clean-dark spreads for the coming years, being accompanied by the expensive upgrade costs to make hard coal/lignite power plants compliant with revised flue gas emissions standards by August 2021, are factors leading to early coal closures.”
Wattsight forecasts the benchmark carbon price – the Dec 19 – to expire at EUR 22/t when it reaches delivery next month. This is around EUR 3.60 or 14% below where it closed on Monday.
The company’s outlook is significantly lower than many others analysts’ predictions. Refinitiv saw prices averaging around EUR 25/t in the fourth quarter, while Alfa Energy expected EUR 26/t.
Others have emphasised the supportive impact of Europe’s Market Stability Reserve (MSR) reform, which began absorbing surplus allowances this year.
It will cut supply by 397m allowances in the 12 months through to September 2020 and continue to curb subsequent years’ auctions while the market remains oversupplied.
Nevertheless, Wattsight saw carbon prices continuing to ease next year with no turn-around yet in sight for the trends in power generation and industrial activity.
It expects the Dec 20 contract to average EUR 20/t under present EU climate policy assumptions.
Incoming European Commission president Ursula von der Leyen has promised to present tougher climate policies within her first 100 days in office, including a higher emissions reduction target for the EU ETS.