On Wednesday 5th November the Council agreed to propose a delay of ETS2 start until 2028. We have modelled the price impact of this start. In summary, the delayed start pushed prices higher in the first few years of market operations.
Although the necessary legislation have not passed the parliament, we have still chosen to update our base-case with this new proposed policy framework, given the considerable political clout that is behind it, we are looking to push this update to the portal during Tuesday 11th November.
The one-year delay will, as per the Council’s proposal, be implemented by triggering Article 30k of the ETS Directive.
In practical terms, 2028 supply will be calculated as 2027 supply would have been without the delay: it uses the ESR cap for buildings and transport in 2024 as the base year with a 5.1% linear reduction factor.
The caps for 2029 and 2030 will then be adjusted to meet the 2030 target on a linear path, starting from the average estimated emissions in 2024–2026.
Front-loading applies as before but starts one year later: 30% of the 2028 cap is withdrawn from the 2030–2032 auctions and placed into 2028–2029 auctions. (We have assumed a split of 80/20 across those first two years.)
The figure shows total supply including front-loading and the resulting MSR releases.
Even before the currently proposed delay, Veyt projected prices to be significantly depressed by the Commission’s proposed MSR amendments, which would effectively bring over 400 million allowances that were previously cancelled back to the market. (See our analysis of the adjusted MSR policies here.)
Compared to our pre-MSR-adjustments base-case, the new delay scenario still results in considerably lower prices. However, when compared to the MSR-adjusted scenario, the delayed start leads to slightly higher prices, at least during the first year of market operation.
In the new scenario, prices are on average €9 /t higher before 2032, and around €7 /t lower thereafter. The year 2032 marks the end of the period when front-loaded volumes are withdrawn from the cap.
With one less year of incentives but an unchanged long-term ambition, the system must deliver the same cumulative abatement over a shorter period. This means higher prices early on, as the market has to “catch up” to meet the 2030 target once trading begins.
The slightly more bearish long-term outlook reflects the fact that higher early-period prices lead to greater near-term abatement, so by the early 2030s the system will have already over-achieved somewhat, allowing prices to ease after 2032.
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