The rise of the carbon price in Europe

The election of Ursula von der Leyen as the Head of the European Commission adds to momentum behind carbon emission reduction appetite in the EU. She promised a « European Green deal within the first 100 days of its mandate ». Objective: to make the European Union « the first carbon-neutral continent by 2050 ». She confirmed her support for a CO2 emissions reduction target of 50-55% in 2030 compared to the 40% currently agreed, and she is considering a carbon tax at the borders, a proposal supported by France since 2009 but fiercely rejected by Germany whose industry is a major exporter. The new President also mentioned her willingness to extend the European carbon market (the EU-ETS) to construction, road transport and maritime transport sectors.

The EU-ETS is a 14-year-old project whose aim is to cut greenhouse gas emissions across the region by setting a limit on the carbon dioxide emitted and which allows participants to trade emissions allowances to ensure they remain under their annual cap. The current project covers only the power sector, energy intensive industries (steel, cement and refineries) as well as inter-European aviation.

Carbon prices have reached a record high as polluters and speculative investors scramble for credits amid an environmental crackdown from the EU. The price of one carbon credit allocated under the EU’s Emissions Trading Scheme has risen almost one-fifth this year and hit a record €29.27 this week, double the level of January last year. There is speculation that the price could climb as high as €40 by winter and reach €65 in 2020.

Until now an excess of permits has prevented the system from doing its intended job. After the financial crisis and the following recession a glut of permits entered the market, keeping the prices low and enabling heavy emitters to simply buy up cheap permits rather than reduce emissions. For years some market players and national governments were perfectly content with an EU ETS that wasn’t working as intended.

The systems’ problems are now, however, being corrected following moves by EU lawmakers to reduce the number of free permits in the system starting in 2019. This may result in a backlash as people and organisations realize what a functioning market will mean for energy prices as well as the marginal cost of production for energy-intensive industries in Europe. It should also encourage governments and utilities to increase investment in renewable and low-carbon power sources and improve energy efficiency.

In parallel, this week a joint statement by France’s Council of Economic Analysis (CAE) and Germany’s Council of Economic Experts lends credibility to the efforts to intensify efforts to reduce carbon emissions. The task for politicians is to design an economic policy in a way that makes it politically acceptable nationally and politically effective globally. Their idea would be to implement a uniform price for CO2 with an expansion of EU‐ETS to other sectors, as well as implement a ‘carbon border adjustment’. Finally they would redistribute these taxes direct to the private sector rather than to the government to avoid voter protest.

These developments demonstrate that the concept of carbon pricing moves further into the mainstream and may have serious consequences for both European and International companies.

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