Guest essay by Eric Worrall
Cold weather, high gas prices, political manipulation of the market and a drop in wind power output created a perfect storm, which is driving up the cost off energy in Europe.
WHY PRICES OF EU CARBON PERMITS ARE AT RECORD HIGHS
January 5, 2022
By Valerie Hernandez, International Banker
n September 27, the price of European Union (EU) carbon-emission permits surged over €65 per metric tonne for the first time, extending a remarkably long rally for the carbon permits that began as far back as March 2020 and shows plenty of signs of continuing skyward.
So, why are carbon-permit prices at record levels at present? A few key factors can explain the ongoing bullishness, but the current shortage of natural gas is perhaps the most impactful. The supply crunch across much of Europe is not only forcing up gas prices—regional gas prices surged more than 350 percent in 2021 to October and by 140 percent during the last three months—but also driving power producers towards cheaper coal, a significantly more pollutive resource than gas.
As such, demand for coal from the power-generation industry soared throughout much of 2021, which, in turn, has boosted demand for carbon permits under both the EU and UK emissions-trading schemes. Indeed, early September saw coal account for more than 5 percent of the United Kingdom’s power generation, its highest level since March. As Tom Lord, head of trading at consultancy Redshaw Advisors, told the Financial Times in early October, the price rises are “being driven, we believe, by increased utility demand, as a result of increased fossil fuel generation”.
Part of the rally in carbon permits is also attributable to political reforms that have been made this year to achieve Europe’s climate targets. In July, the EC introduced a set of proposals to expand the scope of the EU ETS from around 22 percent of EU greenhouse-gas emissions currently to more than two-thirds by 2030. Known as the Fit for 55 package, the proposals also widen the EU ETS to include coverage of the high-emitting shipping industry, reduce the number of permits given to certain industries for free (initially a move designed to help them compete internationally) and decrease the number of permits in circulation each year at a faster rate than is the case at present.
As such, the resulting reduction in the supply of carbon permits should apply considerable upwards pressure on prices. “This is a pioneering package to make polluters pay, extending an EU-wide carbon price to over two-thirds of EU emissions by the end of the decade,” according to Tim Gore, head of the Low Carbon and Circular Economy programme at the Institute for European Environmental Policy (IEEP). “Energy intensive industries are the big remaining free riders—the proposal to only phase-out their emission allowance hand-outs by 2036 must be strengthened.”
It would seem that prices will depend at least partly on gas prices. But a colder-than-normal winter could sustain buoyant demand for coal. “A tight gas market should continue to pull EUA prices higher,” Citigroup analysts reported in late September. …
Over a longer time horizon, moreover, the Fit for 55 reforms that are intended to lower the overall supply of carbon permits to help the bloc meet its 55-percent emission-reduction target is likely to lend considerable support to carbon prices. …
…Read more: https://internationalbanker.com/brokerage/why-prices-of-eu-carbon-permits-are-at-record-highs/
Hands up who wants to open a new factory in an EU country.
The rise in gas prices was partly driven by Russia diverting energy to China, after Premier Xi Jinping’s ill considered attempt to force a reduction in coal burning in the leadup to COP26 caused desperate Chinese inventory shortages and widespread blackouts.
But the European Union in my opinion is culpable for the chain of decisions which made Europe so dependent on Russian gas, and for betting the house on unreliable sources of energy like wind power. A fact the EU has tacitly recognised, with their recent shock decision to include gas and nuclear power in their definition of “green energy”.