EU Carbon Price Emerges as Flashpoint in Push for Cheaper Energy

The future of the European Union’s flagship carbon market is set to become a sticking point in a debate among member states Tuesday on how to reduce energy prices.Author of the article:You can save this article by registering for free here. Or sign-in if you have an account.(Bloomberg) — The future of the European Union’s flagship carbon market is set to become a sticking point in a debate among member states Tuesday on how to reduce energy prices.Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.A gathering of environment ministers in Brussels to discuss lowering the bloc’s energy costs in the face of the Middle East conflict is likely to expose the differences among the EU’s 27 nations over the role of the Emissions Trading System. While Italy and Slovakia are calling for a suspension of the ETS, a group including Denmark and Spain defend the program as Europe’s most effective tool to guide clean investment.Started in 2005, the cap-and-trade system imposes gradually shrinking emissions curbs on more than 10,000 facilities owned by power utilities and manufacturers in sectors from steel to chemicals and cement. The carbon market, which is set for reform later this year, has been criticized by the region’s struggling heavy industry.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.The market adds to the cost of fossil fuel generation, providing an incentive for power companies to decarbonize. Those costs also get passed on to consumers, with carbon prices accounting for around 11% of power bills in the region, according to EU data.For utilities such as Sweden’s Vattenfall AB, the ETS provides certainty for investments and shouldn’t be watered down.“Don’t mess with the ETS,” said Anna Borg, chief executive of Vattenfall. “Regulatory stability is not a nice-to-have. It is what enables the massive investments, required for the transition. Only a decarbonized Europe is a competitive Europe.”The discussion by ministers will prepare the ground for a gathering of EU heads of government on Thursday, where energy is set to be a key issue after the Iran war disrupted global flows of oil and gas. Across European capitals, spiking energy prices are boosting government concerns about inflation and a backlash from voters if the crisis hits consumer wallets.Power prices differ across Europe. They are most expensive in Italy, which relies heavily on gas for electricity generation. Spain has lower power prices as its large renewable fleet makes it less reliant on gas plants, which set the market less often. In a letter to leaders on Monday, European Commission President Ursula von der Leyen highlighted carbon costs as one power price components that the EU regulator wants to address in a short-term plan. She said the commission will propose a review of an ETS mechanism that controls the supply of carbon permits to “more effectively address excessive price volatility and keep prices in check in the short term.” It’s not clear when exactly the EU will put forward the revision of the so-called Market Stability Reserve, which withholds extra permits from the market if a certain threshold of allowances in circulation is met. EU Climate Commissioner Wopke Hoekstra told reporters on Tuesday that it will come before a broader review required by law by July.Any changes to the MSR, which started absorbing permits in 2019, will need approval by member states and the European Parliament. Potential ways to recalibrate the reserve include revising the thresholds or the withdrawal rate, though some policy makers say a proposal to change those could trigger lengthy and heated talks about new levels. The review could also focus on abandoning the planned invalidation of some permits in the reserve, an option recommended last month by Jos Delbeke, one of the ETS’s architects and currently a professor at the European University Institute in Florence. Benchmark EU emissions permits extended their decline on Tuesday, bringing this year’s loss to almost 24%.

For Vitol Group, a top energy trading house, one option to reduce carbon market compliance costs would be to allow for an exceptional release of permits from the MSR. Such a move should be strictly crisis-bound, backed by an intake of international credits and avoid weakening long-term ETS credibility, according to the company’s document seen by Bloomberg News.Other potential scenarios Vitol floated include front-loading auctions of permits, a temporary increase in the number of free permits granted to emitters and accelerated use of imported carbon credits to reduce the costs for companies in the market.Von der Leyen also vowed to accelerate work on the broader revision of the ETS, currently scheduled for the third quarter of this year, “notably to set out a more realistic decarbonization trajectory beyond 2030.” That would deliver on a call by member states in December to give the industry more time to decarbonize and avoid the emission caps dropping to zero in 2039 under the current design of the program.In another move to reduce carbon costs for some energy-intensive sectors, the commission pledged to take into account industry concerns when adopting emissions efficiency benchmarks, which determine how many free permits companies can get, rewarding the cleanest producers.A suspension of the ETS is not an option for the commission, which sees the shift to home-grown renewables and clean technology as a strategy to boost energy resilience, according to people with knowledge of EU internal talks. Such a stance was echoed by the leaders of Denmark, Finland, Portugal, Spain and Sweden last week. “Attempts to weaken, suspend, or narrow the ETS would undermine investor confidence, penalize early movers, distort the level playing field, and slow the transformation of our economies,” they wrote in a letter to European Council President Antonio Costa, who will chair the summit on March 19. “Our countries have demonstrated that fossil free energy can deliver lower prices and greater stability.”—With assistance from John Ainger and Eva Brendel.Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.