EU Carbon Is Pricing In a Less Aggressive Push to Ease Costs
(Bloomberg) -- The European carbon market is scaling back expectations for how aggressive government intervention will be as Brussels looks to ease energy-cost burdens for the region’s ailing heavy industry.
European Commission President Ursula Von der Leyen this month said the bloc would address the carbon component in energy prices when it makes revisions to help contain power costs. At the time, carbon futures hit an almost one-year low on speculation of a push for hard measures to cut prices.
But in a short-term proposal to be put forward on Wednesday, the commission plans to scrap the invalidation of certain permits in its Market Stability Reserve — a mechanism that controls supply in the carbon market — while leaving the volume thresholds and the absorption rate intact, people familiar with the matter said. Carbon jumped as much as 3.2% after Bloomberg reported the plan.
The proposal effectively means the European Union aims to limit carbon price volatility by boosting the number of permits it can keep in the reserve for potential future releases in case of any price swings. That would be a less aggressive move than some traders had priced in following calls by politicians to significantly weaken, or even suspend, the Emissions Trading System.
“If the final proposal is just about the invalidation clause, this will indeed have a structurally bullish impact for EU allowances, as it basically takes away the fear premium attached to any more drastic short-term supply shocks,” said Marcus Ferdinand, chief analytics officer at consultant Veyt.
Member states are worried that high carbon costs will further burden firms that are being strained under energy prices that are higher than for rival industries in the US and China. Europe’s plans to revive its manufacturing sector and get it competing globally are largely reliant on whether officials can lower energy bills for industry. The Iran conflict has also sharpened focus on the issue.
Carbon prices have rebounded about 17% since touching a low on March 19, and reached the highest in more than two weeks on Monday.
Started in 2005, the EU ETS imposes gradually shrinking emissions caps on more than 10,000 facilities in sectors from steel to cement to chemicals. Carbon costs on average account for about 11% of electricity bills across the bloc, with heavy industry criticizing it for being too big a burden.
The MSR mechanism became a key feature of the ETS in 2019, when it started absorbing extra permits from the market if a certain threshold of allowances in circulation was met. The current legislation invalidates any allowances held in the reserve on Jan. 1 every year above the threshold of 400 million.
The change planned by the commission will not release any immediate volumes from the reserve into the market. The commission has a long-standing policy of not commenting on unpublished documents.
“The planned change confirms that the commission does not see the ETS as the main factor behind the rise in energy prices,” Citigroup Inc. analyst Francesco Martoccia said. “It’s also a signal that the broader reform coming up later this year is likely to be shallower than the market expects.”
Other Plans
The EU will also unveil on Wednesday a proposal on updated carbon efficiency benchmarks, according to the people familiar, who asked not to be identified commenting on draft documents. The benchmarks are indices that determine how many free permits certain companies can get to meet emissions quotas.
While the new benchmarks are legally bound to reflect technological developments and improvements, the commission will use flexibilities within its existing laws when determining the values for the 2026-30 period, the people said. Energy-intensive industries have called for freezing the benchmarks to avoid too stringent adjustments that would lead to factory closures.
Following the short-term adjustments, the commission is due to unveil by July a broader review of the ETS to adjust it to a new 2040 target of cutting greenhouse-gas emissions by 90% from 1990 levels.
As part of a deal on the new climate goal struck by EU negotiators in December, the review of the ETS will need to slow the pace of annual emission reductions to avoid the cap dropping to zero in 2039 under the system’s current design. Governments also want to ensure that free allowances are phased out at a slower pace when the bloc gradually introduces its carbon border levy.
Some member states and European Parliament lawmakers have also called for a deeper revision of the MSR, inclusion of negative emissions in the carbon market and a bigger role of imported credits.
The overhaul will also include the ETS Investment Booster — a financing tool for lower-income member states to help industrial decarbonization projects. It will be based on 400 million allowances and is expected to raise about €30 billion ($34 billion). Details of the timeline and design of the proposal remain scant, with some diplomats saying permits could come from various set-asides in the system, including a reserve for new entrants.
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