EU carbon price is back on track – why and what next

After a seven-year hiatus the EU emissions trading system is back to relevant price levels. The carbon price had been lagging below 10 euros per tonne since 2011. This was due to several factors:

  1. Lack of climate ambition globally. The EU would have jumped its 2020 emission reduction target from 20 % to 30 % if a global deal on ambition had been struck in 2009, but it wasn’t.
  2. EU policy focused more on renewables than emissions reductions. Member states created lavish support schemes for renewable electricity (with less action on heating and transport).
  3. A recession set the economy and especially heavy industries on a low-production, low-emission path.

During the past year, the price of carbon has climbed from seven to over twenty euros. Of course, in a well-functioning market the price is always right, because it is formed by a balance between supply and demand. In the carbon market, the politically decided supply was too generous for the circumstances. This has now been fixed with a better economy and several decisions:

  1. A global climate agreement in Paris allows the EU to move forward with more ambitious targets.
  2. More ambitious climate targets force the EU to focus more on cutting emissions cost-efficiently.
  3. The current supply of carbon allowances was cut first by backloading and then by creation of the Market Stability Reserve. The reserve has a boosted impact for the period of 2019-2023.

The revitalized carbon price is good news for Europe. Our economy can now efficiently allocate resources and produce well-being because climate is factored into economic decisions. For the energy sector, this is even better news:

  1. The struggle of how to accommodate more renewable electricity in the energy-only market will be alleviated: electricity prices will better reflect the need for more capacity, both stable and flexible capacity. Most emitting plants will be leaving the market.
  2. Renewable electricity will get an investment boost trough the market and member states can turn their focus on challenges in the transport, heating, industrial and land-use sectors.
  3. The EU has an opportunity to use the quickly decarbonized electricity and district heat (both within the ETS) to decarbonize more difficult sectors like transport and small-scale heating (outside the ETS). Extending the EU ETS to cover these difficult sectors could be the EU level driver of transition.

There is more confidence that carbon price can now be the central piece in the climate and energy puzzle. The next steps should build on this development. The five-year plans of the next Commission, Parliament and Council have an opportunity to set the decarbonization path beyond 2030. Things could also go wrong, if the increased 2030 targets for renewables and energy efficiency lead the member states to impose new domestic policies in the ETS sector. However, every country now has enough challenge in their non-trading sectors; transport, heating, land use etc. so that is the likely focus of national climate action in near future.

Joona Turtiainen

Head of EU Affairs, Finnish Energy

Follow on Twitter: @joonaturtiainen

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