Out of ammunition

What can the EU do to stop carbon prices surging over €100?

In May 2022 I argued that the era of unabated price discovery in the EU carbon market may be coming to an end, and with it a new era emerges in which the EU’s climate politicians wield much more control over the direction of the carbon price.

By providing forward guidance over what is politically acceptable, I argued, the EU hopes to conjure up the magic of the central banks: suppressing carbon price volatility, lowering the cost of net-zero capital, and spurring the investment required to pivot away from Russia and achieve its climate change ambitions.

What then should we make of the European Parliament finally approving the REPowerEU package? Recall that part of the RePowerEU funding will come from the sale of €20bn worth of EU emission allowances (EUAs) over the next few years.

Yesterday, MEPs voted in favour of the sale of EUAs from the EU Innovation Fund (raising €12bn) and the front-loading of auction sales (the remaining €8bn). The sale of EUAs from the Innovation Fund will be partly compensated for by the transfer of 27 million EUAs from the MSR (raising €2.4bn, assuming €90 per tonne).