Early EU carbon price cap change to have biggest price impact – ICIS analysts

ICIS Editorial


LONDON (ICIS)–Changing the base of the EU’s carbon cap and keeping similar market stability reserve (MSR) parameters would secure the steadiest price trajectory to allow for higher climate ambitions, according to a new ICIS model .

This would help keep the market balanced, rather than disrupted in the event of significant changes to MSR parameters, the study said.

ICIS analysts have modelled a set of 26 different scenarios to predict carbon prices during 2021 to 2030. The modelling factors in planned legislation for the EU ETS, the market stability reserve and the 2030 emission reduction target.

Findings suggested that a review of the MSR settings could be significant for market balance during the years 2024-2026.

A revision of the 2030 cap may cause the MSR to reduce its impact on the market balance and remain in place as a backstop in case of a system shock.


Uncertainty has caused dramatic price moves in the European carbon market (EU ETS) recently, with the benchmark EUA Dec-21 price repeatedly surpassing €40/tCO2e, an all-time high since the start of the scheme in 2005.

According to ICIS analysts , the bull-run was spurred by speculative positions.

This view looks corroborated by latest data showing that investment funds increased their net long positions early February, while compliance players switched their power production from coal to gas and sold the corresponding freed-up hedges into the market.

The lack of foresight over upcoming EU carbon legislation is causing the market uncertainty. Clarity may only come in June this year, when the European Commission puts forward proposed new targets.


Designed to provide carbon stability by addressing the surplus of allowances since 2015, the MSR is on track for a review over the course of 2021.

A new revision was made necessary by EU heads of state’s recent decision to sharpen 2030 emission reduction targets as part of the EU climate law.

If the Council of the EU spoke in favour of a 55% emission cut compared with 1990 levels, the Parliament asked reduction targets to be brought to 60%, arguing this latter to be more in line with a 2050 net-zero pathway.

A compromise is expected to materialise in March. ICIS analysts identified a scenario with a 55% net reduction target as the most likely, thus selecting it as a base assumption.


With early re-basing in place, EUA prices are expected to hit the €80/tCO2e level towards 2030, while most other scenarios land in a €50-60/tCO2e corridor towards the end of phase 4.

By Federica Di Sario


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