A senior European Commission official insisted on delivering “a message of calm” during a EURACTIV event on Thursday (2 September), as CO2 prices rose for the first time above the €60 threshold on the EU carbon market.
“I think we need to keep calm with the €60 market,” said Beatriz Yordi Aguirre, a director at the European Commission’s climate directorate in charge of European and international carbon markets.
“We don’t expect that this is going to be a situation that will be lasting a lot,” Yordi Aguirre told the EURACTIV event, dedicated to the EU Emissions Trading System (ETS), calling on participants to distinguish between short term market conditions and longer-term trends.
Carbon prices rose above €60 for the first time on Monday, setting a new record on the EU ETS, the bloc’s carbon market. This had a knock-on effect on electricity prices, which also hit record highs, reaching €140 per MWh in day-ahead trading on Wednesday.
Poland and Spain have highlighted concerns about carbon prices escalating too quickly, an issue that is likely to come up again in the political debate as EU countries examine a proposed reform of the ETS, tabled by the European Commission in July.
“Higher CO2 prices mean that we have to spend billions on compliance costs,” said Pawel Cioch, vice-president for corporate affairs at PGE, the Polish state-owned electricity company.
“This is obviously a problem for a company like PGE, which is today largely based on coal,” he told the EURACTIV event, which was supported by PGE.
‘The market is working’
But the Commission’s Yordi Aguirre said high carbon prices were the result of several factors, including rising gas prices and a reform of the EU ETS adopted two years ago to prop up the price of CO2 and encourage companies to cut emissions.
“It’s true that we are now in a context of high gas prices,” she conceded though, saying that this was only short term and possibly linked to “a geopolitical situation” related to the Nord Stream gas pipeline.
“in our impact assessment, we have been working with prices between 50 and 80 euros,” she said.
“The market is working and sends a strong decarbonisation signal,” Yordi Aguirre added, pointing to “investment mechanisms and other tools” at the disposal of EU member states to cope with high carbon prices and “drive decarbonisation in a proper way.”
Analysts agreed, saying the EU carbon market was delivering an appropriate price signal to decarbonise the economy.
“If you want to hinder an explosion in carbon prices, what you can do is support your industry in the decarbonisation pathway,” said Florian Rothenberg, a power and carbon market analyst at ICIS, a market intelligence firm. He dismissed the idea of introducing a price ceiling, saying “the only effect it can have is that you don’t reach the decarbonisation target in the end”.
Milan Elkerbout, a researcher at the Centre for European Policy Studies (CEPS), agreed, saying “separate mechanisms” are needed to address high carbon prices instead of changing the ETS, which fulfils its role by sending a price signal to decarbonise the economy.
“It might be necessary to think more about compensatory measures. But there’s also an increasing amount of auction revenues for the member states to implement these themselves,” he suggested.
Frans Timmermans, the EU climate chief, also warned against intervening on the market in reaction to high prices. “That would absolutely undermine the credibility of the emissions trading system,” he said earlier this year as carbon prices rose above €50 for the first time.
Poland sees ETS shortage ‘in five to six years’
Still, countries like Poland have complained that the proposed reform of the ETS will leave them short of carbon allowances before 2030.
“Poland has a structural deficit of allowances which has been estimated by independent think tanks at over 600 million of allowances less than expected emissions until 2030,” PGE’s Cioch said. “I expect this should happen in this decade, in maybe five to six years,” he replied when asked by EURACTIV when the shortage of allowances will start being felt.
At current prices, this means Polish companies will need to buy €40 billion worth in allowances to bridge the gap, Cioch added, which “results in less funds to finance the energy transition” in Poland.
Overall, meeting the EU’s 2030 climate target will cost Poland €136 billion, Cioch indicated. And even though more funds will be available under the EU’s modernisation fund set up under the ETS, these won’t be enough to bridge the gap, he warned.
“After taking into account all available funds, we have estimated the investment gap in Poland at €93 billion,” Cioch said.
Elkerbout expressed doubts about Poland’s claim, saying “the idea that a member state is short of allowances is not one we’re supposed to be having in the ETS,” which is pan-European in essence.
Besides, he said, there were compensation mechanisms already included in the ETS, such as the modernisation fund, dedicated to supporting the 10 lower-income EU member states in their transition to climate neutrality.
In its planned ETS reform, the Commission proposed roughly doubling the EU modernisation fund.
“There are many levers to be pulled already in the legislation. And I’m sure a solution can be found for that,” Elkerbout said, adding this was a political question “that can only be answered at the highest political level, possibly even the European Council,” which brings together EU heads of states and government.