EU Carbon Price Whipsaws as Timmermans Says Climate Package Success Requires ‘Statecraft’ (3)

By Mathew Carr

July 14, 2021 (LONDON): EU carbon allowances whipsawed as Frans Timmermans, vice president of the European Commission, said countries would have to be careful as they criticise a complicated commission plan to slash emissions by at least 55% by 2030 vs 1990 levels and try to get their way as part of a multi-month negotiation process.

Because of the way European lawmaking takes place, the commission’s plans are not set in stone. EU member countries will get to negotiate on the plans, which often involves fraught horse trading.

The EU nations need to use “statecraft” and compromise to get the package of laws agreed and implemented, Timmermans said. He said he was not urging countries to accept the commission’s package without complaint.

The year 2030 is effectively only 8 years away so lawmakers need to move quickly, he said.

The statecraft will go beyond the region’s borders. Allowances which would otherwise be allocated for free to industry sectors will instead be covered by a new Carbon Border Adjustment Mechanism (CBAM) and they’ll be auctioned, the commission said. The auctions will add to price tension in the market.

The CBAM could also add to hedging demand in the world’s biggest carbon market by traded volume, placing upward pressure on prices, according to Lawson Steele, joint head of carbon and utilities research at Berenberg bank, writing on Linked In. “This is a market that is desperately short of supply of permits.”

The CBAM will require importers to pay the EU carbon price at the bloc’s borders for certain energy intensive goods.

James Whiteside, global head of multi-commodity research at Wood Mackenzie, said: “Crucially, while most of the EU’s green agenda is inward-looking, the CBAM aims to prevent carbon leakage and ultimately encourage the rest of the world to reduce emissions. The mechanism will create a level playing field on emissions costs for companies exporting goods to the EU and EU producers already subject to the emissions trading system.”

“I’m sure if we give the right example, many, many will follow,” Timmermans said of other countries following Europe’s ambition. But it won’t be easy, he repeatedly said.

Indeed, the EU’s green legislative undertaking is probably one of the biggest lawmaking efforts in world history.

The Commission proposed that emissions from the current EU emissions trading system sectors be reduced by 61% by 2030, compared to 2005 levels. This represents an increase of 18 percentage points compared to the current -43% contribution from the system to the EU’s climate target. To reach this target, the Commission proposes a steeper annual emissions reduction of 4.2% (instead of 2.2% per year under the current system).

It reviewed the Market Stability Reserve, which regulates supply vs demand, and proposed to strengthen it, enabling it to absorb the historical surplus of allowances more quickly and to ensure market stability, notably by maintaining the currently increased annual intake rate of allowances. 

The Commission is also proposed to apply emissions trading in new sectors, where sharper reductions are needed to reach the 2030 target — emissions from maritime transport will be included in the existing EU ETS, while emissions from fuels used in road transport and buildings will be covered by a new, separate emissions trading system.

EU carbon futures in euros per ton. ICE

See here for questions and answers document:
https://ec.europa.eu/commission/presscorner/detail/en/QANDA_21_3542

All documents are here:
https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal/delivering-european-green-deal_en#documents

I’m adding some additional relevant Tweets here:

Here is a chart on options for the market stability reserve:

https://ec.europa.eu/info/sites/default/files/revision-eu-ets_with-annex_en_0.pdf

Here is a chart outlining options for the linear reduction factor (LRF), which is how fast and what’s the shape of the reduction in the EU’s carbon cap. Carbon markets are designed to have reducing caps and higher prices, squeezing emissions down and saving the climate:

https://ec.europa.eu/info/sites/default/files/revision-eu-ets_with-annex_en_0.pdf

EU is also also tightening its renewables and energy efficiency policies, which reduce the need for high carbon prices.

(Updates with some details, context; Tweets, charts)

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