By Susanna Twidale
LONDON (Reuters) - Analysts have raised forecasts for the prices of European Union carbon permits through 2019 to 2021 but warned the threat of a no-deal Brexit still hangs over the market in the short term.
EU Allowances (EUAs) are expected to average 26.40 euros/ton this year and 34.37 euros/ton in 2020, according to a survey of eight analysts polled by Reuters.
The forecasts were up 8.6% percent and 6.7% percent, respectively, from prices given in April, when the projections were for 24.31 euros in 2019 and 32.21 euros in 2020.
The European Emissions Trading System (ETS) charges power plants and factories for every ton of carbon dioxide they emit.
Analysts said the price forecasts had been increased to account for more demand from industrial firms which will receive fewer free permits over the next few years, and due to a market stability reserve (MSR) designed to remove surplus allowances.
"With the MSR in full effect, it is expected that from 2019-2023, the market will run short, leading to a large increase in EUA prices," said Ben Evans, an analyst at ClearBlue Markets.
Analysts at Refinitiv said they had also increased their forecasts as recent high carbon prices meant much of the possible fuel switching, from coal to gas plants had already taken place.
"Depleted fuel switching potential in the near term will limit additional emission reductions and continue to keep carbon detached from further bearishness in gas markets," Refintiv analyst Ingvild Sorhus said.
Prices have already soared this year, with the benchmark carbon contract this week hitting an 11-year high as utilities increased hedging ahead of cuts in supply from auctions in August and as oil prices rose.
In the short term, whether or not Britain leaves the European union with a deal is likely to have the biggest impact on prices.
"After a no-deal Brexit, we could see prices drop well below 20 euros/t, which would reset the level from where the market would then trade," said Energy Aspects analyst Trevor Sikorski.
Under a no-deal scenario, Britain would automatically leave the European scheme, leading to expectations of a sell-off by British firms holding EU carbon permits they no longer need.
Levies under the ETS would be replaced by a carbon tax from Nov. 4 if Britain leaves the EU with no deal.