Analysts raise EU carbon price forecasts after reform agreement

LONDON (Reuters) - Analysts have increased their average price forecasts for EU carbon permits for the next three years after EU countries this week approved plans to revamp the bloc’s carbon market, but warned prices could remain volatile along with swings in European energy costs.

EU Allowances (EUAs) are expected to average 86.17 euros a tonne in 2023 and 96.19 euros in 2024, a Reuters survey of seven analysts showed. That is up 5.9% and 2.2% respectively from forecasts made in January.

The forecast for average prices in 2025 rose by 2.5% to 104.84 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.

EU countries on Tuesday gave the final approval to reforms of the ETS which are set to make it more costly to pollute, phasing out free permits for some industries and expanding the market to include shipping.

“The bullish impact of the final agreement on ETS reform and compliance demand in the first quarter has injected strong momentum and significantly boosted market prices,” said Yan Qin, Refinitiv's lead carbon analyst.

"We maintain our view that the EUA price will continue to rise in the coming years as market participants prepare for tighter balances," she said.

Qin and other analysts however warned Europe’s volatile energy markets would likely have a big impact on EUA demand and prices.

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 milder than usual weather dented demand, but gas prices still remain high historically.

“We believe that the (carbon) market will continue to follow the energy complex,” said Goda Aglinskaite, analyst at Clearblue Markets.

He said some industrial firms, which are also buyers of carbon permits, paused production due to high gas prices last year and had still to decide when to restart.

"Many industrials remain hesitant to restart and are waiting for additional developments in the gas prices...Thus, the (permit) demand from industrial side, remains limited too," he said.

(Reporting By Susanna Twidale; Editing by Kirsten Donovan)