Demand for EU allowances (EUAs) in the EU Emissions Trading System (ETS) is unlikely to see significant increase on the back of expected economic growth in Europe in 2014 and 2015, analysts said.
The contraction of industrial production and its associated carbon emissions because of the recession has been the main factor for the price crash in phase II (2008-2012) of the EU ETS.
Industrials, which received an amount of free EUAs calculated on the basis of pre-recession production levels, accumulated a large surplus which is still weighing on the scheme.
But after six quarters of stagnation or contraction in a row, there have now been “encouraging signs” that an economic recovery is underway in Europe, said the European Commission in its latest forecast published in November 2013, a trend expected to gather speed in 2014.
The Commission expected the EU economy to grow by 0.5% in the second half of 2013 compared with the same period in 2012. For the whole 2013, growth is estimated at 0.0% but recovery is expected to gradually gather pace, to 1.4% in 2014 and 1.9% in 2015.
However, it is too early to declare the crisis over as the legacy of the recession should continue weighing on growth, although its impact is expected to gradually subside over the next two years, the report added.
Light at the end of the tunnel?
According to analysts the impact of economic recovery on carbon demand will be limited.
“The big question is where does that recovery come from and I don’t think it will be much from energy-intensive industry,” said Trevor Sikorski, head of natural gas, coal and carbon at UK-based consultancy Energy Aspects.
“Generally, energy-intensive industry is not looking to grow in Europe – cheaper labour and energy in North America do it there – and these industries typically have lagged the overall growth in the economy,” he added, pointing to the decrease in industrial production.
For Benjamin Schmitt, EU carbon market analyst at ICIS’ Tschach Solutions, there is “a light at the end of the tunnel” after a very difficult year for the manufacturing and heavy industry.
“Still, some sectors are going to have more difficulties to recover production like the cement industry, but others like the metal industry may have already bottomed out,” he said.
The EU cement sector was the largest industrial sector in terms of emissions between 2008-2012.
In Spain for instance – where the cement sector was the third largest in the bloc in phase II – cement production slumped by 18% year on year in the period January-October 2013, according to cement association Oficemen.
EUROFER – a lobby representing the European steel sector, third largest industrial sector for emissions in phase I - forecast a “moderate recovery” for 2014 ( see EDCM 25 October 2013 ).
Matteo Mazzoni, carbon analyst at Italian energy consultancy Nomisma, also agreed that carbon demand won’t be boosted much by the economic recovery.
“I don’t expect a significant [carbon] demand increase on the basis of the available economic indicators, even if compared with 2013 we should see some shy recovery signals,” he said.
“Demand of EUAs could instead increase for different reasons in the next few months: back-loading of auction supply on one hand, and on the other hand the delays in the allocation of free permits for 2013 could push companies to buy on the market.” Silvia Molteni