Analysts have significantly increased their forecasts for European carbon prices in the bloc's Emission Trading System (ETS) for 2018 and 2019 to take into account the progress made in market reforms designed to curb oversupply. Analysts expect EU Allowances (EUAs) to average 6.23 euros/tonne in 2018, and 8.78 euros/tonne in 2019, according to the poll of seven analysts published on Wednesday.

The forecasts were up 10 percent and 23 percent, respectively, on prices given for the last poll published in January, of 5.67 euros for 2018 and 7.12 euros for 2019. The European Union's ETS, a cap-and-trade permit system to regulate industry pollution, has suffered from excess supply since the financial crisis, depressing its prices.

As part of the process to fix the scheme the European Parliament in February adopted draft reforms for post-2020 and agreed to double the amount of permits that would be withdrawn from 2019 and placed into a so-called Market Stability Reserve (MSR).

"The developments regarding the EU ETS reforms give a more bullish tone for prices after 2018 compared to our previous forecasts," said Sandrine Ferrand, analyst at Engie Global Markets. Benchmark EUAs currently trade around 5 euros/tonne, and analysts said prices would likely rise this year, but that the increase would be curbed by excess supply. The analysts expect EUAs to average 5.33 euros/tonne in 2017, little changed from the January average forecast of 5.25 euros/tonne. In an effort to boost prices and curb the oversupply of allowances a total of 900 million EUAs were being gradually withheld from government auctions from 2014 to 2016 in a process called backloading.

Copyright Reuters, 2017