View from Brussels: Marketing is everything

The European Union’s emissions trading scheme will be the foundation stone of new climate policies that aim to decarbonise the bloc’s economy. As pollution permit prices hit record highs, the market’s architects want to use that momentum to go green even faster.

‘If it ain’t broke, don’t fix it’ the old saying goes. Ask most climate policy analysts and they will tell you that the EU’s carbon market - the ETS - is finally working the way it should, by putting a proper price on a tonne of emitted carbon.

This week, pollution permits - which emitters such as energy-intensive industries, power producers and domestic airlines have to purchase to offset their emissions - breached €55 per tonne (£47). At the beginning of 2021, the price was around €30.

ETS logic is rather simple: emissions are paid for by buying permits and those revenues are used to fund green technologies. If the price of a permit is substantial enough, companies will invest directly in cleaner processes or green energy.

A mechanism attached to the market removes the number of permits available every year, making them more scarce and therefore driving up the price. A glut of allowances in the market's early years kept the price low.

Last month, EU negotiators agreed that the bloc’s new emissions-curbing target for 2030 should increase from 40 per cent to 55 per cent, so that a net-zero goal for 2050 comes within range. That confirmation has helped to drive the price up.

But countries like Poland, which rely heavily on polluting coal for energy generation and which want to use natural gas as a bridge fuel towards renewable power, are not happy at the bullish market.

That is because they are not well-placed to absorb the extra costs and the impact of the pandemic has already made finances a sore point. Poland wants the EU to step in to calm down the price increase, which Brussels is allowed to do in certain circumstances.

EU climate boss Frans Timmermans is glad to see the ETS doing its job, though, and wants the price to keep increasing, pushing the dirtiest energy sources out of the system in favour of cleaner ones.

“It’s a market and we should be very, very careful not to intervene because that would create a non-market-based price, and that would absolutely undermine the credibility of the emissions trading system,” Timmermans told an online event.

He added that “it’s a market, so who am I to say what’s too high or too low? It’s a market mechanism, but if we want to achieve our goals, I think the price should be much higher than it is even at €50. But that’s up to the market.”

In order for energy sources like renewable hydrogen to come into the mix or for emissions-capturing technology to attract serious investments, analysts think that a price closer to €100 will be needed.

Germany, the EU's biggest emitter, is playing its cards close to its chest when it comes to the upward price trend. Its environment ministry has acknowledged the increase, explaining that it is due to renewed investor confidence in both the market itself and the EU's set-in-stone policies.

But Berlin also insists that the increase will not continue exponentially and will gradually start to settle down. Whether that is an attempt to try and calm the market remains to be seen. Germany, after all, also relies heavily on coal for power since its nuclear phase-out.

A crucial milestone is approaching. In July, the European Commission will announce how it intends to reform the ETS as part of a scheduled review of the legislation that regulates the market. Big changes are expected.

The review will arguably be the most significant pillar of a big package of reforms that will also increase the EU’s renewable power and energy efficiency targets, as well as an expected ramp- up of car emission standards.

On the ETS agenda is the inclusion of maritime transport for the first time and a decrease in the number of free permits allocated to aviation. Both aspects are still being fine-tuned by the Commission.

The new rules - which have to be approved by national governments and the European Parliament - might also create a separate ETS for road transport and buildings, which will funnel revenues into schemes like renovations.

Activist groups like Transport & Environment have warned in the past that including road transport in carbon trading is a pointless exercise as the price would have to reach more than €200 for it to have any impact.

They have also pointed out that emission standards and fleet targets have so far proved rather successful in pushing forward electrification, with car giants like Volkswagen already committing their immediate manufacturing future to green mobility.

Such a large review could spoil the price increase party if done poorly, but given that it will take several months for EU officials and diplomats to agree on new rules, the risk of a botched job is still only a long-term worry.

But with the Covid pandemic dumping large amounts of permits on the market due to a slowdown in industrial activity and the UK launching its own carbon market linked to the ETS price, Brussels will have to be careful that outside factors do not ruin progress already made.

Markets are, after all, a very unpredictable beast.

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