EU Floats Measures to Restrict Prices in New Carbon Market
(Bloomberg) -- The European Union plans to propose measures to limit the impact of its new carbon market, hoping to ease concerns among national governments about the cost of cutting emissions before a key debate on the bloc’s climate target.
The European Commission, the EU’s executive arm, intends to tighten price controls in a new cap-and-trade system for heating and transport fuels, according to a letter sent to member states on Tuesday and seen by Bloomberg News. The letter, signed by Climate Commissioner Wopke Hoekstra, comes two days before an EU leaders’ summit where they’ll discuss an ambitious 2040 emissions-reduction goal.
In June, 19 member states — including Italy, France, Germany and Poland — urged the Commission to amend the new emissions trading system, known as ETS2, to prevent price spikes that could spark a backlash against climate policies.
“I understand the concerns regarding uncertainties on future price levels and price volatility in ETS2 and share those to a large extent,” Hoekstra said in the letter. He added that while the ETS2 already includes measures to prevent sharp price jumps, the Commission has reviewed additional ways to make the system more stable and predictable when it begins.
Carbon trading is key to the EU’s plan to reach climate neutrality by mid-century and cut emissions 55% by 2030 from 1990 levels. The system rewards companies that cut pollution faster and brings in revenue to help vulnerable households. But some member states worry that rising carbon prices could spark pushback from consumers and businesses.
BloombergNEF estimates that without changes to the current market design, the price of emitting carbon dioxide under the new system could reach €149 a ton by 2029 — more than 80% higher than the current EU price for power plants and industry.
To limit costs for businesses and consumers, the Commission wants to tighten rules to keep carbon prices steadier under ETS2. If prices top €45 in the system’s early phase, extra permits can be released from a reserve. The EU now plans to double the number of those permits.
The letter said the Commission also plans to clarify that the price-control mechanism could be used twice within a 12-month period if activated. Together, those measures may add as many as 80 million permits to the market each year in 2027, 2028 and 2029.
Other elements of the proposal include:
- The Commission will keep any unused allowances in reserve after 2030
- The EU will allow ETS2 permits to be auctioned earlier, starting in 2026
- The European Investment Bank is exploring a “Frontloading Facility” to help member states pre-finance programs that speed up the rollout of clean technologies in ETS2 sectors
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