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Vulcan Insight | EU Carbon Price Reaches Record as EU Commission Prepares “Fit for 55” Package

As the European Commission prepares to adopt its landmark “Fit for 55” climate and energy package in July, carbon permits under the EU’s Emissions Trading System have, this week, reached the highest level since their introduction in 2005. 

Since 2005, the Emissions Trading System (ETS) has been the cornerstone of the EU’s fight against climate change inducing greenhouse gas emissions. According to the European Commission, the ETS is the “world’s first major carbon market and remains the biggest one” to date. Under the system, it is mandatory for more than 11,000 power plants, energy-intensive factories and airlines operating European flights to purchase permits for each tonne of CO2 they emit.

Under the ETS’ “cap and trade” principle, a so-called cap is set on the total level of certain emissions that may be emitted by an industry over a year. With only a limited amount of carbon permits available annually, and those available reducing over time, the system is designed to effectively put an increasing price on polluting industries.

While individual companies are allowed, and encouraged, to trade their annual emissions allowances, it must have enough to fully cover its annual emissions or face fines. In case of stare credits, these may either be transferred to the coming year or sold on the EU’s carbon market.

Meanwhile, the ETS’ underlying intention is to encourage companies to invest in new low-emissions and/or carbon-neutral technologies or effectively face growing costs for their polluting practices.

In fact, since the von der Leyen Commission announced it would make fighting climate change via the EU Green Deal one of its legislative cornerstones, the price of credits has been rising sharply. For example,  on 4 January, it rose to a previous record of €34.25, before hitting a highly anticipated mark of €50 per tonne of CO2 this week.

The news was celebrated by the Greens in the European Parliament who argued that this was a further sign that only imposing steep costs would force companies to decarbonise. According to a Green MEP, at a price of €50-€60 per tonne of CO2, coal-fired power plants would become too costly for operation, thus effectively being forced out of the power supply.

The ETS’s new record also comes as the European Commission just adopted its first EU Climate law and prepares to present its “Fit for 55” package in July. With some 13 legislative proposals, the package is set to bring significant updates and revisions to the EU’s array of climate, energy and transport rules with the goal of reducing carbon emissions by 55% by 2030 and achieve carbon neutrality by mid-century.

Among the cornerstone of the package will be the revision of the ETS, including its expansion towards maritime, car and aviation transport, as well as its introduction as an EU own resource. In addition, the Commission is set to put forward a proposal for a Revision of the Regulation on the inclusion of greenhouse gas emissions and removals from land use, land use change and forestry, the Energy Tax Directive, as well as a Border Carbon Adjustment Mechanism among others.

Compliments of Vulcan Consulting – a member of the EACCNY.