LONDON, Oct 3 (Reuters) - Analysts have sharply raised their forecasts for carbon prices in the EU Emissions Trading System (ETS) to 2021 after the market surged more than 40 percent over the past three months, but warned a correction may be on the horizon in the short term.

EU Allowances (EUAs) are expected to average 23.01 euros/tonne in 2019 and 26.96 euros/tonne in 2020, according to a survey of eight analysts polled by Reuters.

The forecasts were up 24 percent and 30 percent, respectively, from prices given in July, when the projections were for 18.59 euros in 2019 and 20.76 euros in 2020.

Analysts increased their forecasts for 2021 to an average of 26.11 euros/tonne, up 19 percent.

The ETS charges power plants and factories for every tonne of carbon dioxide they emit.

Prices have more than doubled this year, with utilities ramping up hedging ahead of supply cuts coming into effect from 2019 and as more speculative traders entered the market.

“With the market being driven upwards by speculative capital, and with no obvious trigger to arrest the bull run, we expect it will largely continue,” Energy Aspects analyst Trevor Sikorski said.

The ETS has suffered from excess supply since the financial crisis, but this will be addressed by new measures starting next year such as the Market Stability Reserve, which will remove some surplus allowances from the market.

In the shorter term, several analysts warned that current prices, around 21.50 euros/tonne, could undergo a correction.

“Just looking at the number of options ‘in the money’ you get the idea that if there’s a bubble in the market it may burst out soon,” said Matteo Mazzoni, analyst at Nomisma Energia in Italy.

Mazzoni and analysts at Refinitiv said there were nearly 170 million tonnes of open interest, in-the-money call options, with a December expiry date.

“This is a main bearish risk factor for the Q4 price. We might even see the sell-off take place before December since a sell-off after option expiry is widely expected,” Refinitiv senior analyst Ingvild Sorhus said. (Reporting By Susanna Twidale; Editing by Dale Hudson)