Hibernation

How the EU carbon market is adapting to a long geopolitical winter

Photo by Marc-Olivier Jodoin on Unsplash

In Whatever it takes (published 19th May 2022) I outlined why I believe the EU carbon market is, at least for now, moving towards a market whereby politicians have significantly more say in what is politically and economically acceptable, and (even more importantly) what isn’t:

“The EU carbon market regulations do not prescribe a price floor for carbon, nor a ceiling. That has now changed, albeit implicitly in the manner of the central banker. The era of unabated price discovery is coming to an end, and with it emerges a new era in which the EU’s climate politicians will wield much more control over the direction of the carbon price.”

In this world, forward guidance by EU politicians and policymakers would become the de-facto utterances of central bank governors. It’s in this vein that comments from a key architect of the EU ETS are important.

Jos Delbeke, professor at the European University Institute in Florence has appeared to revise down his assessment as to what is an acceptable level for the EU carbon price. In an interview with Politico Delbeke suggests that €70 per tonne is the new implicit ceiling:

“The zone beyond €70 up to €100 is, I think, a critical level that deserves quite a bit of reflection”

This represents a significant retrenchment in ambition compared with what he expressed only a few months ago. In an interview with Bloomberg in April, Delbeke called for carbon prices to continue “within the range of 60-90 euros, without much volatility outside this range”.

The focus on €70 per tonne is less about the right price to drive decarbonisation. We know that carbon prices need to be significantly in excess of €100 per tonne to drive industrial decarbonisation (see The long term price of emission & What price decarbonised shipping?).

It’s about survival. This winter, and the next. Political pressure in the leadup to the upcoming elections in Italy (25th Sept) and Poland (autumn 2023), etc. will inevitably focus on the energy crisis (see How to think about political risk in carbon markets).

In that environment, the EU carbon price is an easy target.