Major new study details how carbon prices across the bloc could double by 2021 if the EU moves to make emissions trading scheme compatible with the Paris Agreement
EU carbon prices topped €13 a tonne this week, continuing the recent bullish run that has revived hopes the bloc's carbon market could yet play a major role in driving low carbon investment across the continent.
However, according to a major new analysis from influential think tank Carbon Tracker the recent surge in EU carbon prices could have a long way to go yet.
The analyst house will today publish a new report, entitled Carbon Clampdown: Closing the gap to a Paris compliant EU-ETS, which details how carbon prices would rise rapidly over the next decade if Brussels moves to tighten carbon targets in line with the Paris Agreement.
The report suggests carbon prices could double by 2021 and then quadruple to €55 a tonne by 2030 if the European Commission ultimately legislates to align the bloc's current emissions targets with the Paris climate treaty.
Building on Carbon Tracker's long-standing carbon bubble hypothesis the report details how if carbon prices do rise in line with Paris Agreement compatible emissions targets, even the most efficient coal and lignite power plants would quickly become unprofitable.
Report author Mark Lewis said coal operators across the EU were facing significant risks. "Life is set to get much tougher for EU coal generators," he said. "Higher carbon prices will eat further into operating margins that have already been severely eroded by the growth of renewables, forcing less efficient coal plants off the grid altogether. Under a Paris-compliant EU-ETS cap the shock to coal would be even greater, forcing all coal and lignite plants - even the most efficient - either off the grid or to the margin."
The report, which is Lewis' first for Carbon Tracker since he joined the analyst house from Barclays, found that under a Paris-compliant cap for the EU-ETS, carbon prices would need to average €45-€55/tonne for a sustained period to drive coal and lignite power plants out of the market and deliver sharp emissions reductions.
It argues that under such a scenario a major shift away from coal power would take place in Italy, Spain, Germany and the Netherlands. "High carbon prices are also likely to accelerate the development of large-scale energy storage, smart grids and demand-side response, where energy users shift consumption away from peak periods," the report adds.
Any attempt to impose more ambitious emissions reductions target and a tighter cap that would lead to higher carbon prices would likely face fierce opposition from some industry groups and Eastern European states.
However, there are reasons to believe a sharp increase in EU carbon prices could be engineered in the coming years.
Recent reforms to the market have already seen the surplus of allowances in the market reduced and carbon prices have responded, climbing from a low of €4.38 per tonne in May 2017 to a record of €13.82 per tonne this month.
From January 2019 a new Market Stability Reserve will come into force and will cancel 24 per cent of the surplus each year up to 2023 and 12 per cent thereafter. Carbon Tracker projects that the move could see carbon prices hit €20 in 2019 and €25-30 in 2020-21 as the supply squeeze starts to bite.
At the same time the UK has demonstrated how a unilateral carbon floor price can help push coal off the grid far faster than many industry analysts expected, while having a limited impact on energy prices.
Meanwhile, EU member states last month officially called on the European Commission to come up with a plan for bringing the bloc into line with the goals of the Paris Agreement. And, only this week Ministers from France, Germany, the Netherlands, Sweden, Finland, Portugal and Luxembourg called for the bloc to pursue climate policies that could meet the Paris Agreement goal of limiting temperature increases to 1.5C.
This will require a substantial increase of the level of ambition of EU action, including a much higher target for emissions reductions for 2030 and pathways to reduce carbon emissions to net zero.
Lewis said carbon pricing could play a major role in delivering on the goals of the Paris Agreement. "Carbon pricing won't be sufficient on its own to achieve the Paris goal of limiting warming to well below 2C, but it does have a vital role to play: Carbon prices put a value on the limited amount of CO2 we can store in the atmosphere if we are to avoid catastrophic climate change," he said. "The space left for increased concentrations of greenhouse gases is the ultimate scarce resource, and it is imperative that it be priced accordingly."
Wendel Trio, director of campaign group Climate Action Network (CAN) Europe, said there was now growing momentum behind calls for a significant strengthening of the EU's climate policy framework.
"More and more European countries agree that the EU needs to do more to tackle the climate crisis and fully implement the Paris Agreement," he said. "The critical conversation on how to increase the EU's climate commitments is finally moving forward. We urge all other European countries to join this coalition, make the Paris Agreement a reality and align EU policies with the ambition to limit temperature rise to 1.5C. The draft long term climate strategy to be published within a year is the ideal opportunity to go well beyond the current commitments."
Calls for higher carbon prices will inevitably face a significant push back from some carbon intensive industries and economies, but all investors and businesses need to be aware that the recent surge in EU carbon prices could have a very long way to run yet. And those businesses that ignore the prospect of higher carbon prices could quickly find themselves lumbered with stranded and unprofitable assets.
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