What are the effects of the price increase for the CO2 allowances on the EU ETS market?

Europe - May 16 2019
  • #carbon

What are the effects of the price increase for the CO2 allowances on the EU ETS market?

In ICIS' report entitled "The European carbon market: the impact of rising carbon prices on electricity producers and industries" published on 9 May 2019, the consulting firm argues that the significant increase in EU ETS market carbon prices to levels above €20 per tonne of CO2 in 2018 had very little influence on 2018 emission levels in the European carbon market. On the other hand, a higher carbon price, around €40 per tonne in 2023, could change future investments, leading to a substitution of coal by gas.

Source: ICIS - 2019. “The European carbon market: the impact of rising carbon prices on electricity producers and industries”

Indeed we can see on the graph above an increase in the price of the EU ETS market's CO2 allowance, which rose during 2018 from 7 euros per tonne in January to 25.5 euros in December. Under the influences of the entry into force of the MSR (market stability reserve) on 1 January 2019 and the vote on the carbon market directive for the period 2021-2030, the price of the CO2 allowance jumped significantly even to a value of 27.46 euros in early April 2019. In parallel, emissions covered by the EU ETS market fell by 3.5%, mainly driven by the electricity sector (-6.4%). However, ICIS indicates that the price of CO2 has played a minor role in this decrease in emissions, particularly in the electricity sector where the downward trend had "begun since 2010". Indeed, this decrease could be mainly explained by a reduction in fossil energy production (mainly coal and lignite) as well as an increase in renewable energy production, mainly in Germany and the United Kingdom.

As can be also seen on the graph, ICIS forecasts an increase in the price of allowances in the coming years, to 40 euros per tonne in 2023.  According to the report, there would be a reduction in the volume of allowances auctioned by about 1.7 billion over the coming 2019-2025 period, with increased pressure from 2021 onwards. The scarcity of allowances on the market, combined with other European policies over the same period (gradual elimination of coal, energy efficiency policies, support for renewable energies) will then lead to the increase anticipated by ICIS. Contrary to the apparent lack of direct correlation that was observed in 2018, with expectations of a €1 yearly increase in the price per tonne of CO2 , the report forecasts a direct effect though a reduction in emissions of 4.7 million tonnes in the six main European countries (Germany, France, United Kingdom, Italy, Spain and Poland), representing a 0.8% reduction in electricity sector emissions in these countries.  In this scenario, for example, Germany would see a 34% reduction in lignite-fired electricity generation, a 6% reduction in coal-fired electricity generation, and a 17% increase in gas-fired generation.

Félix Fouret : Carbon/Climate Analyst
Source: Beyond Ratings, ICIS

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