Falling carbon prices threaten funding needed for EU’s green transition – Business

Carbon dioxide prices in the European Union’s emissions trading markets, known as Emissions Trading Schemes (ETS), have fallen sharply in recent months. This is good news on the face of it, as it means that the industries covered by the scheme emit less harmful emissions. At the same time, however, “cheaper” emissions mean less money for the green transition, according to an analysis by energy news site Oilprace.

In the second half of February, the prices of carbon permits under the Emissions Trading Scheme fell briefly to €53 per tonne for the first time since August 2021, after even trading above $100 per tonne in February 2023. tone. The drop came as a surprise to the architects and supporters of the ETS in Brussels, who had plans for much higher emissions prices to fill funds earmarked for payments during the green transition from polluting energy sources.

A few days ago, Reuters estimated that the ongoing decline in carbon prices since the beginning of this year has wiped more than 4 billion euros from the ETS market.

Graph of the price of carbon ETS emissions in Europe (in euros per tonne)

When the ETS scheme was created, its purpose must have seemed simple enough – electricity companies produce carbon dioxide emissions during their normal operations. Since carbon dioxide was chosen as the number one enemy of modern Europe, they were obliged to pay for harmful emissions released during the process by buying so-called “carbon permits” at market prices. Market prices meant that supply and demand would determine how much emitting companies paid to stay in business.

On the one hand, this idea would provide the means to advance the transition from carbon dioxide-emitting energy sources such as coal and gas to supposedly zero-emitting sources such as wind and solar. On the other hand, by making emissions expensive, the ETS mechanism would also incentivize emitting companies to invest in alternatives that reduce their emissions. And that’s exactly what happened.

Solar and wind installations in Europe have been booming, at least until last year, as a result of which electricity production from these renewables reached record levels. But this means that coal and gas plants produce less electricity and emit less harmful emissions. And that in turn means they need fewer carbon permits, which in turn means less money available for green transition funds – something that no one in the European authorities in Brussels seems to have thought about.

European politicians who created the ETS believed it would incentivize more wind and solar power – which it did – while allowing polluting power companies to continue emitting harmful emissions so the EU could get even more wind and solar funding. And they made this assumption based on the idea that the supply of carbon permits would be gradually reduced, pushing up their prices up.

The authors of the ETS also believed that the carbon market would reduce harmful emissions – and it did. Last year, emissions covered by the ETS fell by a significant 15.5% year-on-year, a record low. This was a result of the increasing share of wind and solar electricity, which also reached a record and resulted in lower generation than gas and coal power. The fact that the prices of carbon permits also fell was by no means a coincidence, but no one seemed to think much of it at the time, and many are now concerned about the falling prices of harmful emissions.

The EU’s climate commissioner, Wopke Hoekstra, recently said he would aim for a 90 percent reduction in emissions across the bloc by 2040. Researchers at the London Stock Exchange Group estimated that this would mean ETS prices would jump to 400 euros per ton by the same year, according to a Euractiv report from October last year. But in view of the current falling carbon prices, this is highly unlikely to happen.

In theory, limiting the supply of a needed product or service while still having demand should have worked. But what European rulers seem to have forgotten is that they cannot really force high-emission power producers to continue doing business as usual, when that business costs even more to continue to grow. Polluters are curtailing their energy production because it is becoming increasingly difficult to compete with heavily subsidized wind and solar power. And because they limit production, they emit less harmful emissions and need fewer carbon permits.

The EU is now planning to extend the Emissions Trading Scheme (ETS) to other sectors, including transport. The hope is that this will bring in more money for the green transition. What would likely result as a side effect, however, would be a repeat of what happened to polluting power plants: higher costs would kill demand, ultimately failing to achieve one of the two main goals that the EU she has set herself. But this idea is likely to succeed in achieving the second main goal: destroying demand, which will definitely lead to lower prices for harmful emissions and less money in green transition funds.