Is the EU emissions trading system failing?
The price of European Emissions Allowances (EUAs), the tradeable unit under the European Union (EU) Emissions Trading Scheme (ETS), jumped from €7/tCO2e in 2018 to an 11-year high of €27.46/tCO2e at the beginning of April this year, reports market analyst ICIS. During the last year, emissions under the carbon trading scheme in Europe fell by 3.5%.
According an ICIS market insight, the increased carbon price had only a marginal effect on reducing emissions in 2018. The downward trend in emissions was driven by the power sector, which specifically increased renewable generation replacing fossil fuel generation.
The Market Stability Reserve (MSR) is the key reform of the EU ETS and ICIS expects this mechanism will reduce auction volumes by roughly 1.70bn EUAs during 2019–2025, tightening the system and pushing companies to reduce carbon emissions. Government policy and regulation will form part of these reductions, but carbon prices will be the lever that controls the speed at which new investments will take place, notes ICIS. The report states that a high carbon price could accelerate the use of lower carbon technologies and the coal-to-gas switch.
‘We expect some lag in the adoption of new technologies by industry as they continue to receive a greater part of the allowances for free, in order to shield them from the carbon leakage risk. But more stringent benchmarks and higher prices should provide the catalyst toward long-term investment in cleaner production technologies and energy efficiency,’ say Phillip Ruf and Matteo Mazzoni, joint authors of the ICIS European carbon market analysis.
They add: ‘Triggering higher carbon prices, this new framework will, in fact, also result in higher revenues from national auctions, thereby providing the possibility for government to subsidise investments in the different sectors by re-investing the achieved revenues.’