Analyst EU carbon price forecasts edge higher but risks remain

FILE PHOTO: Smoke billows from the chimneys of Belchatow power station in Poland

By Susanna Twidale

LONDON (Reuters) - Analysts have increased their average price forecasts for EU carbon permits for the next three years on expectations that Europe's economies could start to improve as energy prices fall from record highs.

But they warned an increase in permits sales would keep a lid on gains.

EU Allowances (EUAs) are expected to average 81.40 euros a tonne in 2023 and 94.14 euros in 2024, a Reuters survey of six analysts showed. That is up 4.2% and 1.9% respectively from forecasts made in October.

The analysts forecast for average prices in 2025 rose by 0.6% to 102.24 euros/tonne.

The European Union's Emissions Trading System (ETS), forces manufacturers, power companies and airlines to pay for each tonne of carbon dioxide they emit as part of Europe's efforts to meet its climate targets.

European gas and electricity prices have retreated from record highs seen last year following Russia's invasion of Ukraine, as Europe built up large gas reserves and as milder than usual weather dented demand.

The sharp fall in energy costs is leading to expectations of an improved outlook for economies across Europe.

"Potential recovery in industrial activities could drive up demand for allowances and support (carbon) prices," Yan Qin, Refinitiv lead carbon analyst said.

The picture however is complicated by Europe's "REpowerEU" plan launched last year, to sell an increased number of allowances through government auctions over the next few years to help raise 20 billion euros that would help fund the bloc's transition away from reliance on Russian fossil fuels.

EU member states and the European Parliament all need to formally approve the plan before the sales can begin.

“The front-loading of EU ETS auctions will start some time in 2023, right after the bill is voted upon: as a result, that will put additional bearish pressure on EUA prices in 2023 and beyond," said Goda Aglinskaite, analyst at Clearblue Markets.

(Reporting By Susanna Twidale; Editing by Alex Richardson)