A strengthened and expanded carbon market

Posted on Jul 14, 2021 at 7:00 PMUpdated on Jul 14, 2021, 8:13 PM

Bigger and stronger. This is what the European carbon market should be like in the future. With a view to reducing the Union’s greenhouse gas emissions by at least 55% by 2030, the European Commission presented on Wednesday its proposal to reform the largest market for “rights to pollute ”to the world. Pending this long-announced text, the price of a tonne of CO2 has jumped by more than 60% since the start of the year, exceeding 58 euros at the beginning of the month, before falling back a little at the beginning of the month. over 50 euros.

The Commission proposes to occasionally lower the ceiling for emission quotas as soon as the text comes into force, then by 4.2% per year, against 2.2% currently. The market stability reserve, which makes it possible to eliminate the surplus of allowances and which had allowed prices to rise since 2019, will also be strengthened to avoid further shocks. Enough to tighten the market and allow it to adapt in the event of a crisis.

End of free quotas for aviation

As for aviation, intra-European flights, which entered the market in 2012, will remain covered by the current carbon market, but airlines will see their free allowances gradually phased out by 2027. That’s one of the surprises of the text and that risks representing a cost for the airlines which received up to 80% of their quotas free of charge. International flights will be mainly covered by the Corsia system set up by the UN. A proposal deemed “counterproductive” by the International Air Transport Association Iata.

Other sectors such as cement, steel, iron, aluminum, fertilizer and electricity, will have a little more respite. From 2026, they will see their free quotas gradually decrease over ten years, as the border carbon tax is implemented.

The reform also provides for an extension of the current market to the maritime sector. This was eagerly awaited because the sector’s emissions are not currently covered by any regulations. “Maritime transport is today the stowaway in the fight against climate change”, summarizes Pascal Canfin, president (Renew, liberals) of the Environment committee of the European Parliament. This extension will concern very large ships and will be implemented gradually until 2026. Their emissions will be covered at 100% when they travel between two European countries or when they are at the quayside and at 50% when they arrive or depart. from a European port to the rest of the world. At the current price of carbon, companies will at most have an incentive to slow down the speed of their boats. But the carbon revenues that will be generated could make it possible to accelerate the decarbonization of the sector in the medium term.

A new explosive market

Much more explosive, the text presented by the Commission also provides for the creation, from 2026, of a new carbon market for road transport and heating of buildings, whose CO2 emissions continue to increase. This new market will apply to suppliers of fuel for road transport and to suppliers of fuel for heating buildings. The companies concerned would not benefit from any free quota, but a mechanism would be put in place to avoid price peaks. “With this contract, we will encourage a wave of renovations in the building”, explains a senior European official. A proposal encouraged by Germany but which arouses strong reservations in France and a barrage of most Member States and environmental NGOs.

With a price per tonne of carbon that could easily exceed 200 euros, they fear a repercussion on heating and gasoline bills, which would hit the most modest households head-on. “I am totally opposed to it”, declares Pascal Canfin, who points to “a very low climate gain” for a “very high political cost”. Everyone keeps in mind the episode of “yellow vests” and the specter of a similar movement on a European scale worries.

Little reaction in the market

To mitigate the shock a little, the Commission has planned to set up a social climate fund partly financed by revenues from this new market and which could amount, with the contribution of the Member States, to nearly 145 billion. euros. Ineffective, according to NGOs, who stress that price volatility in a carbon market would make the impact on households difficult to anticipate, and therefore to compensate. Given the opposition it arouses, this new market is, for the moment, unlikely to pass the stage of the European Parliament.

These announcements have not finished generating debate, but they have elicited virtually no reaction in the market. “The price of carbon should remain between 50 and 60 euros until the end of the year, estimates Sebastian Rilling, analyst at ICIS, but that will also depend on the gas market. In view of these announcements, ICIS forecasts a carbon price of 90 euros in 2030.

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