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EU Carbon Price Recovery Sustains, But Is More Needed?

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After years of low carbon prices and similar expectations, a price recovery that started last year in the EU's Emissions Trading System (ETS) has continued -- despite some occasional volatility due to gas price fluctuations, worries about the UK's departure from the EU and broader concerns about a US-China trade war. With prices now seemingly settling into a range in the high €20s, the market-based mechanism seems to have overcome its previous shortcomings -- thanks largely to the adoption early last year by the EU of a market stability mechanism, MSR, capable of finally dealing with the oversupply of permits that long dogged the ETS, replacing that with a perception that carbon emission allowances (EUAs) will be scarce in future. This in turn has attracted financial players back into the market, boosting liquidity (NE Jun.28'18). Still, concerns linger about whether the ETS alone can deliver the EU's long-term carbon reduction goal -- with policymakers across the continent looking more seriously at a net-zero emissions goal by midcentury. In 2018 the EU reported a decline in emissions of 3.5% from 2017 levels -- driven largely by a 6.4% fall in power sector emissions. The ETS however gained little credit for this, with coal phaseout plans seen as a bigger driver of the transition to lower-carbon electricity supply. But if carbon prices can hold around current levels and gas prices remain low, this could change, with the ETS playing a bigger role this year, analysts suggest. "We are in the range of seeing switching from coal to gas," driven by the ETS, Marcus Ferdinand, head of European power and carbon analytics with market information provider ICIS, told Energy Intelligence (NE Aug.30'18). While Europe's power sector is rapidly decarbonizing -- with falling prices for wind and solar a big factor behind this too -- a market-based solution "alone" is not enough to decarbonize heavy industry, notes campaign group Carbon Market Watch (CMW). It points to 2018 EU data showing that emissions from industry -- which account for 40% of the EU total -- have not declined, attributing this to the continued allocation of free permits to big steel, chemical and cement companies. Almost 90% of industrial emissions are covered by the free allocation of permits, CMW complains, resulting in no market signal for companies to invest in lower-carbon processes. This has led some to question whether it's worth continuing with a market-based approach, including from the European United Left/Nordic Green Left grouping in the EU parliament. Carbon tax proposals have meanwhile been gaining ground in some quarters, although these are proving divisive, not least in Germany. Chancellor Angela Merkel has backed a carbon price for sectors beyond the EU ETS -- such as buildings, transport and agriculture -- although these face political resistance from within her party. A recent poll also suggested that around 60% of German voters oppose a carbon tax on fossil fuels. A move to impose such a tax proved controversial in France as well -- sparking protests against the government -- although President Emmanuel Macron remains supportive of some sort of carbon tax or tariff that would be applied on goods entering the EU from other markets without a comparable carbon price in place -- as a means to level the playing field with low-cost manufacturing centers like China, for example (NE Jan.24'19). But there's no reason the EU ETS cannot exist alongside carbon taxes in the broader economy, provided the latter don't cover sectors already included in the ETS. And having broken through and remained above the psychologically important €20 ($22.36) level for influencing low-carbon investments and decision-making, the EU ETS has been given a "big confidence boost," ICIS' Ferdinand noted. "Tremendous effort" has been put into making the ETS fit for purpose and strengthen it again, which involved "lots of political capital," Ferdinand added. He believes the ETS can coexist and complement other carbon-reduction policies, welcoming recent moves by the EU to firm up its post-2030 climate vision, which promises to give market participants greater long-term policy certainty. Ronan Kavanagh, London

Topic:
Low-Carbon Policy
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