EU ETS in pricing ‘no man’s land’

The EU emissions trading system (ETS) is sitting in a period between traditional price signals from the power sector and expected future industrial sources of price direction, delegates at a conference in Florence, Italy, heard today.

The EU ETS is "right in the middle" of the transition phase from a power-centric to industrial-driven market, head of carbon markets at Spanish bank BBVA, Ingo Ramming, told the event, pointing to the fall in hedging of carbon allowances by the power sector as a result of renewable capacity buildout and reduced power demand in the current economic slowdown.

Improvements in the economy could see more forward hedging by industrials, Ramming said. Aviation and shipping — the other sectors covered by the EU ETS in which decarbonisation has so far been limited — could be further ahead on this if they had synchronised their carbon hedging with their fuel hedging, Ramming added.

But until industry steps in to fill the current gap, the EU ETS is "in no man's land", head of research at fund manager Andurand Capital, Mark Lewis, said.

"Carbon this year is a price taker, not a price maker," head of market research and analysis at environmental commodities trading firm Vertis, Stefan Feuchtinger, said. "Carbon doesn't matter to the carbon price."

But while Lewis sees this gap leaving space in the market open to the financial sector, attributing recent price direction and volatility to speculators, Feuchtinger believes there is still "significant" power hedging in the EU ETS, even if at much lower levels than in the past.

Feuchtinger expects the carbon market to continue to be priced by the utility sector until 2026-27, when there is no longer sufficient coal in the market to justify this and pricing shifts to the industrial side.

Where the carbon price will sit once it is set by industrials is "less straightforward", Feuchtinger said. Carbon capture and storage is key to this, he said, but depends on where it is based and which technology is used, requiring carbon prices in a range of €90-150/t of CO2 equivalent.

And while carbon prices sitting well below these levels mean less action is currently being taken to develop solutions for industrial decarbonisation, this time delay will lead to larger price spikes in the future, he said.

By Victoria Hatherick