Carbon price in Europe drops as EU considers market intervention
The carbon price in Europe fell by over 5% on Tuesday, March 17, after the President of the European Commission announced that Brussels would consider increasing the supply of emission permits to help to curb soaring energy prices.
The modification of the European Union’s carbon market has become a battleground among EU members and the core of the internal debate on attempts to contain rising energy costs due to the Israeli-US war against Iran. At the heart of the political clash is the Emissions Trading System (ETS), the cornerstone of the European Green Deal, now disputed between those who advocate protecting the economy and those who defend the ecological transition.
In a letter to EU leaders before the European Council on March 19 in Brussels, Ursula von der Leyen stated that the Commission is preparing measures to address high energy prices. The proposed ETS revision “will set a more realistic decarbonization trajectory beyond 2030,” von der Leyen explained in a document sent to EU ministers and seen by Reuters.
These measures would include changes to the supply of emission permits in the Union’s carbon market to keep prices under control in the short term. The EU also intends to reconsider the decision to limit the amount of free CO2 allowances granted to industries and will use the planned ETS system review scheduled for July to reconsider its post-2030 plans.
Increasing emission allowances to lower carbon prices
Increasing the supply of emission allowances should artificially lower the carbon price, which has already fallen after the announcement of negotiations. Reconsidering plans to reduce free permits for industries and reviewing the decarbonization trajectory should, according to the Commission, ease the burden on industries grappling with geopolitical shocks. Furthermore, Brussels could allow greater state aid to industries if high carbon prices further increase utility bills.
In a recent speech, Ursula von der Leyen said that without the ETS, the European Union would today consume almost 100 billion cubic meters more gas, and thus would be even more vulnerable to external blackmail.
EU member states disagree on ETS
Countries are divided on whether to intervene in the Emissions Trading System, the EU’s most important climate change policy. Launched in 2005, the ETS obliges power plants and industries to purchase permits to cover their CO2 emissions.
During a meeting in Brussels between EU ministers, some member states expressed caution, awaiting more detailed proposals to understand whether the Commission’s intervention would weaken the system’s effectiveness.
“It all depends on how quickly or to what extent you intend to adapt the system,” Dutch Climate Minister Stientje van Veldhoven-van der Meer told Reuters, referring to von der Leyen’s post-2030 plan. “There could be significant consequences for our ability to meet climate goals.” German Environment Minister Carsten Schneider, on the other hand, stated that Germany would only be prepared to support “slight adjustments” that do not compromise the investment signal that the ETS sends to companies about the need to proceed with decarbonization.
Italy and Hungary aligned on ETS
Conversely, Italy and Hungary would like to suspend the system for gas power plants to prevent the cost of carbon from impacting utility bills. On average, the ETS accounts for 11% of energy bills in Europe, but the share exceeds 20% in countries that use more polluting energy sources. Hungarian Secretary of State for the Environment, Aniko Raisz, reported that Budapest demands “measures that have a real impact on market prices and not just superficial interventions.”
“The market and investors need stability, so we cannot suspend the rules overnight,” said Polish Deputy Secretary of State for Energy, Wojciech Wrochna.
The EU’s proposals aim to be a compromise between the demands of some governments, such as the Italian one, which want to suspend the ETS, and those of others, such as Sweden and the Netherlands, which oppose its weakening.
The EU maintains a firm stance against Russia despite energy price hikes and the war in Iran
“The European Union will not yield to pressure to re-establish relations with Russia to offset the surge in energy prices triggered by the war in Iran,” stated Dan Jørgensen, EU Commissioner for Energy. “We have decided, within the European Union, not to resume imports of Russian energy,” the EU Commissioner added on the sidelines of the Energy Ministers’ summit.
“We have been dependent on Russian energy for too long, allowing Putin to blackmail us and use energy as a weapon against us; we are determined to stay the course on these issues,” he continued. “It would be a mistake to repeat what we have done in the past. In the future, we will not import even a single molecule from Russia.”
“Europe must finally reduce its vulnerability to global energy shocks. For this reason, we are examining all components of the energy bill. Concrete measures will be discussed by EU leaders later this week,” Jørgensen stated.
It was Hungarian Prime Minister, Viktor Orbán, who advocated for resuming trade with Russia, also asking the EU to suspend sanctions against Moscow. Belgian Prime Minister, Bart de Wever, had also stated that the EU should negotiate with Russia to, over time, “regain access to cheap energy.”