Carbon markets forecast to weather short-term price dips

Carbon market participants believe prices will fall over the next two years but rebound strongly in the second half of the decade, according to a recent survey by IETA and PwC.

Despite forecasting near-term declines in carbon prices in the face of political and macroeconomic uncertainty, carbon market participants are optimistic that reforms will drive compliance market prices higher in the coming years and the voluntary carbon market will grow to meet increasing demand, states new research from the International Emissions Trading Association (IETA) and professional services giant PwC.

European respondents expect EU Allowance (EUA) prices to average €84.40 ($90.12) between 2023 and 2025, compared to a current price of €85.50 – a 1.2% decrease in the predicted price to 2025 from last year’s survey. Similarly, the expectation for California carbon allowance (CCA) prices dropped by 10.3% from last year, while expectations for RGA permits in the north-eastern US RGGI (Regional Greenhouse Gas Initiative) market dropped by 18%, for the UK ETS by 7.5% and for New Zealand’s NZU by 12.5%.

Despite the falls in short-term expectations, the survey reflected that carbon market participants believe prices will be higher in the period from 2026 to 2030, with EUAs forecast to average €100, CCAs $51.54 and RGAs $45.83.

Regulators are also predicted to keep ramping up the ambition of their carbon market pricing systems. Nearly half of the respondents anticipate the EU will set an emissions reduction target of 75% or more when policymakers begin the task of crafting the bloc’s 2040 emissions reductions goals later this year. Similarly, more than two-thirds of respondents expect lawmakers in California to extend the state’s carbon market beyond 2030.

There remains some uncertainty over what target RGGI states will adopt for the market’s next phase. But new markets have also emerged in the past year in Washington state while New York’s governor recently announced the creation of a state-wide cap-and-invest system. Nearly half the survey respondents expect the New York market to begin by 2025.

The decline in carbon offset price expectations has been more severe, with prices for standardised ‘N-GEO’ (nature-based global emissions offset) contracts now expected to average $20.00 between 2023 and 2025, compared to a forecast of $33.36 in last year’s survey. Nonetheless, 71% of respondents were confident the market will be able to scale up supply sufficiently to meet growing demand, compared to 66% in last year’s poll.

Most of those questioned said they plan to use nature-based removal credits in their offsetting strategy, especially afforestation, soil carbon and sequestration, and biochar. Further, almost three-quarters (72%) of respondents expect the carbon offset credit to bifurcate into two classes for reduction/avoidance credits and carbon removal credits, with the share of respondents predicting this shift having risen steadily in the last three years.

The annual carbon market prices survey among IETA members has been undertaken by PwC and IETA every year since 2005, with this year’s poll carried out in April and receiving responses from 187 members.

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