CARBON MARKETS : European Commission publishes proposed free allowance Benchmarks

Research evidence excerpt

CARBON MARKETS : European Commission publishes proposed free allowance Benchmarks

Refinitiv

Given that the consultation is in line with the leaked draft we do not expect a big move in share prices or carbon prices

from today’s announcement. However, the future supply and demand balance for the carbon market remains highly

uncertain given a lack of details about the Commission’s proposed new ETS Investment Booster.

We show below our updated carbon market model, with allocation between free allowances and auctioning versus

emissions. This includes today’s updated Benchmarks but also our assumptions about how 400mt of extra allowances

to fund the EUR30bn ETS Investment Booster will be brought to market. Quicker monetisation of these allowances

compared to our assumption could collapse the carbon price in our view.

Figure 2: ETS Investment Booster timing and mechanism is critical to carbon pricing

Emissions, free allocations and auctions to 2030 (mt) Annual ETS1 supply/demand balance to 2030 (mt)

3000 Phase 2 Phase 3 Phase 4 200 Phase 3 Phase 4

international 150 credits backloading market stability

2500 reserve 100

extra EU 50

2000 auctioning to 0

raise funds

-50

1500 -100

-150

1000 -200

-250

500 -300

-350

2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Free allocations Auctions Emissions

legal cap Cummulative surplus Annual Surplus (Deficit)

Source: European Commission, BNP Paribas Research estimates

We show below our updated scenario for long term emissions, allowances and auctioning. This will depend on carbon

market reforms to be proposed in July as well as whether the EU is successful in meeting its 2030, 2040, and 2050

greenhouse gas emission targets.

Figure 3: Long term balance will depend on July review and whether EU hits climate targets