Germany Adopts Cautious Outlook for Cost of Pollution
Germany Adopts Cautious Outlook for Cost of Pollution
(Bloomberg) -- Germany is anticipating more gentle increases in the cost of pollution allowances than some forecasters, limiting the size of a fund to pay for Chancellor Angela Merkel’s transition to cleaner energy.
The government expects allowances in European Union carbon dioxide cap-and-trade system will rise 8% to 27 euros ($29) a ton by 2021 and then advance to 28 euros by 2023, according to the internal forecasts seen by Bloomberg News. The current price of credits in the Emissions Trading System is just under 25 euros a ton.
The forecasts suggest Germany’s government may raise just 3.5 billion euros from carbon trading next year, one of the people said. That’s down from roughly 3.9 billion euros it could take in for 2019 if prices remain about where they are. While tighter environmental rules are pushing up the cost of allowances, Germany and other nations are reining in the amount they issue, which may reduce the money flowing into the treasury if price gains subside.
For the German government, the biggest impact would be on the Energy & Climate Fund, which was set up by Chancellor Angela Merkel’s government to help soften the economic blow from shifting the economy away from using fossil fuels. The fund is the main instrument paying for the program, which will cost hundreds of billions of euros over the coming decades.
The government is having to balance calls for quicker cuts in emissions against the concerns of miners and power plant workers who will be left jobless as the country weens itself off coal. It’s unusual for Germany’s detailed budget assumptions to leak into the public domain, and the government outlook for the carbon market is considerably more conservative than forecasters such as Energy Aspects Ltd. and BloombergNEF.
Weaker economic growth is weighing on carbon prices, one of the officials said. So is cheaper natural gas prices and Britain’s effort to leave the European Union.
Germany’s forecast compares with Energy Aspects’ outlook for carbon at 34 euros in 2021. BloombergNEF says prices could jump to 48 euros next year.
Abundant gas supplies have widened margins for running power plants that use the fuel. At the same time, strong carbon prices make it more expensive to burn coal. A shift toward the cleaner fuel would reduce demand for carbon allowances in the EU Emissions Trading System, helping explain the conservatism in Germany’s forecast.
Brexit is another factor. Britain’s departure from the EU may damage trade. The U.K. economy shrank in the second quarter, and German industrial production has sputtered in recent months, raising the risks of a slump across the continent.
Ursula von der Leyen, due to take over as European Commission president in November, signaled she wants much more agressive cuts to carbon emissions. She’s targeting a reduction of 50% or even 55% by 2030 from 1990 levels. The current limit is set at a 40% cut.
While the EU has ambitious plans to implement a green deal and is working to scale back fossil fuel emissions, those programs aren’t likely to lift carbon prices anytime soon, one of the people familiar said.
That program if adopted may push up carbon prices, since the depth of the cuts suggests policy makers may have to reduce the scale of auctioned and free allowances they offer the biggest polluters. For now, enough EU nations are resisting the program that there’s no certainty the new president will achieve her wish.
To contact the reporters on this story: Mathew Carr in London at m.carr@bloomberg.net;Brian Parkin in Berlin at bparkin@bloomberg.net;Birgit Jennen in Berlin at bjennen1@bloomberg.net
To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net, Lars Paulsson
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