Last week, EU carbon allowances (EUAs) traded at €10/tCO2 intra-day for the first time since 2011. Although this was fleeting, front-year EUAs have since continued to trade above €9.00/tCO2. Significantly, the EUA price has increased by approx. 20% since the end of December. A degree of confidence returned to the market as MEPs gave their approval to a provisional agreement to restrict oversupply to the market in Phase 4, which commences in 2021.
The EU ETS is the cornerstone of EU climate policy and is an essential tool with which to meet its target under the Paris Agreement. The EU and its member states are committed to a binding target of at least a 40% reduction in greenhouse gas emissions by 2030 compared to 1990. The EU ETS model places a limit on the amount of CO2 that can be emitted by energy-intensive installations each year. EUAs equal to the CO2 cap are issued each year, the majority of which are sold at auction. At the end of each year, installations must surrender allowances equal to their emissions, thereby maintaining an overall limit on emissions and placing a value on CO2. A higher carbon price encourages investment in low-carbon technologies. However, EUAs have historically traded significantly below the real cost of climate change, which is considered to be at least €30. The introduction of the mechanism to control supply is expected to help to correct this, although many believe the steps are not strong enough.
In the UK, carbon pricing for the UK’s power sector is structured as a combination of the EU ETS plus a tax known as the Carbon Price Floor. This approach has encouraged emissions reductions in the UK’s power sector, which fell by 47% between 2012 and 2016. It is not yet known whether the UK will continue to participate in the EU ETS after Brexit or if a UK equivalent will be introduced. Recent indications are that ministers are pushing for the UK to remain in the scheme until the end of Phase 3 in 2020. Carbon taxes ultimately feed through to the end consumer, with the level being dependent upon the carbon intensity of generation.