The European Union’s emissions trading scheme will be the cornerstone of a new climate policy aimed at decarbonising the bloc’s economy. With pollution prices hitting record highs, the market’s architects want to use that momentum to go green even faster.
“If it ain’t broke, don’t fix it,” goes the old saying. Ask most climate analysts and they will tell you that the EU’s carbon market – the ETS – is finally working properly, by correctly pricing a ton of carbon emitted.
This week, pollution permits – which emitters such as energy-intensive industries, power producers and domestic airlines must buy to offset their emissions – exceeded € 55 per tonne (£ 47). At the beginning of 2021, the price was around € 30.
The ETS logic is quite simple: emissions are paid for by purchasing permits and those revenues are used to finance green technologies. If the price of a permit is high enough, companies immediately invest in cleaner processes or green electricity.
A mechanism linked to the market removes the number of permits available each year, making them scarcer and thus driving up the price. An abundance of rights in the early years of the market kept the price low.
Last month, EU negotiators agreed that the bloc’s new emissions reduction target for 2030 should be raised from 40 percent to 55 percent, bringing a net zero target for 2050 within reach. That confirmation has helped drive up the price.
But countries like Poland, which rely heavily on polluting coal for energy generation and want to use natural gas as a bridge fuel to renewable energy, are not happy with the rising market. That’s because they aren’t well placed to absorb the extra costs, and the fallout from the pandemic has already made finances a painful point.
Poland wants the EU to intervene to calm the price increase, which Brussels is allowed to do under certain circumstances. However, EU climate boss Frans Timmermans is happy that the ETS is doing its job and wants the price to continue to rise and push the dirtiest energy sources out of the system in favor of cleaner ones.
“It’s a market and we have to be very, very careful not to intervene, because that would create a non-market price and that would absolutely undermine the credibility of the emissions trading system,” Timmermans told an online event.
He added that “it’s a market so who am I to say what’s too high or too low? It’s a market mechanism, but if we want to achieve our goals, I think the price must be much higher than even only € 50. But that’s up to the market.
”To get energy sources such as renewable hydrogen into the mix or to attract serious investment, analysts believe a price closer to € 100 will be needed.
Germany, the EU’s biggest emitter, plays its cards close to the chest when it comes to the upward price trend. The Ministry of Environment has acknowledged the increase, stating that it is the result of a renewed investor confidence in both the market itself and the entrenched EU policies.
But Berlin also emphasizes that the rise will not continue exponentially and will gradually start to weaken. Whether that is an attempt to calm the market remains to be seen.
After all, Germany has also been heavily dependent on coal for power since the nuclear phase-out. A crucial milestone is approaching.
In July, the European Commission will announce how it plans to reform the ETS as part of a planned review of the legislation regulating the market. Major changes are expected.
The review will perhaps be the main pillar of a major package of reforms that will also raise the EU’s renewable energy and energy efficiency targets, as well as an expected increase in car emissions standards.
The ETS agenda for the first time includes the inclusion of maritime transport and a decrease in the number of free aviation permits. Both aspects are still being adjusted by the Commission.
The new rules – to be approved by national governments and the European Parliament – could also lead to a separate ETS for road transport and buildings, directing revenues to projects such as renovations.
Activist groups such as Transport & Environment have warned in the past that it is a pointless exercise to include road transport in carbon trading, as the price would have to be over $ 200 to have any impact.
They have also pointed out that emissions standards and fleet targets have so far proved fairly successful in boosting electrification, with auto giants like Volkswagen already leveraging their immediate production futures for green mobility.
Such a major overhaul could ruin the price hike party if done poorly, but given that it will take several months for EU officials and diplomats to agree on new rules, the risk of job failure is still only a concern in the long-term.
But with the Covid pandemic dumping large volumes of permits on the market due to a slowdown in industrial activity and the UK launching its own carbon market linked to the ETS price, Brussels will have to be careful not to let external factors ruin the progress already made .
After all, markets are a very unpredictable beast.