09 December 2011

Lately, headlines about the carbon market have been alarming:

“EU carbon price falls!” “CO2 prices drop!” and “Carbon price crashes the record!” Carbon prices are the lowest since the financial crisis of 2009. For the climate, the crucial question is not, however, how many percentage points the carbon price has changed in the last weeks. The EU ensuring it doesn’t miss out on a cost-efficient decarbonisation trajectory for 2050 is much more important for the climate.

It does not really matter if carbon prices are at 5, 10 or 12 euros per tonne. The fact is, the EU’s carbon market does not currently have enough ambition to avoid the EU locking itself into an unsustainable energy future.  . With an overabundance of permits, coming from low demand and oversupply, there is not a strong enough price signal to help deter high-carbon investments. Without more scarcity of permits the EU will slip away from an economically viable emission reduction trajectory because prices would be too low to cost-effectively achieve 80 to 95% emission cuts by 2020, as agreed by the EU leaders in 2009.

Hopes that the weather forecast will change and a cold winter will help to slightly increase energy demand and help carbon prices is not a solution. The financial crisis made it clear that markets need guidance and the EU carbon market is not an exception. Only a decisive political decision by EU leaders to remove at least 1.4 billion emission permits from the third ETS trading period (2013 – 2020) would help prices to recover and get back on track to a low-cost emission reduction pathway. Investor certainty must be restored and CO2 permits must be seen as assets that have and will continue to have rational economic value. 

Some Member States may think that avoiding lock-in to a high-carbon future is not a good enough reason to strengthen the EU ETS. However, they may be convinced by a vision of their auctioning revenues shrinking. Without engineering the carbon market, the governments’ coffers are expected to be much lighter. Assuming a carbon price of €10/tonne in 2013 growing to €13/tonne by 2020, the EU-27 auctioning revenues would be almost €100 billion less compared to income that Member States would receive from selling allowances under a tighter cap, with an estimated carbon price of €24/tonne in 2013 and €29/tonne in 2020.

Reinforcing the carbon price requires decisive, swift and focused action. Member States must remove the surplus of permits and restore carbon prices to guarantee that the EU ETS will remain an effective pillar of EU climate policy. Otherwise we risk losing not only billions of euros from auctioning revenues in the upcoming EU ETS trading period, but also billions more later on after missing the most cost-efficient pathway to low-carbon economy.