A number one European Parliament lawmaker has warned towards the potential “unintended consequences” of intervening within the EU carbon market, amid rising calls from some governments and industries to curb the exercise of monetary actors taking speculative positions within the EU emissions buying and selling scheme (EU ETS).
The value of carbon allowances on the EU ETS rose by round 150% over the previous yr, reaching an all-time excessive of €98.49 per tonne in mid-February 2022.
The value rally has put the ETS beneath scrutiny in some EU capitals as they grapple with sky-high vitality costs. Some governments, such as Poland or Spain, have demanded motion to research the presence of monetary actors, corresponding to funding or pension funds – which can have fuelled hypothesis on the EU’s carbon market.
The European Commission has repeatedly downplayed these claims, saying that costs replicate the EU’s greater local weather ambition. Last yr, the EU set into regulation a goal of decreasing emissions at the very least 55% under 1990 ranges by 2030 earlier than reaching net-zero by 2050.
Similarly, a current report from the European Securities and Markets Authority (ESMA) launched on the finish of March discovered no main abnormalities in the carbon market’s functioning, however advisable growing transparency and monitoring within the EU ETS.
The guidelines underpinning the EU ETS are at present being revised to replicate the bloc’s greater local weather ambition, with the carbon market anticipated to ship a 61% emissions discount by 2030 within the sectors coated in comparison with 2005 ranges.
Swedish centre-left MEP Jytte Guteland, the lawmaker overseeing the carbon market reform for the Socialists & Democrats (S&D) group within the European Parliament, has warned towards value intervention available on the market.
According to Guteland, releasing allowances from the supply-absorbing Market Stability Reserve (MSR) might immediate CO2 costs to all of a sudden drop, and therefore decrease incentives for industries to decarbonise.
“We don’t want to meddle into the system and get unintended effects that would harm a market-based mechanism and its predictability on the longer term,” Guteland advised a EURACTIV occasion.
“Even though we have had higher prices in recent years, it is not where it should be,” the Swedish MEP warned, saying a value of at the very least $100 was wanted to supply an incentive for industries to decarbonise.
A examine by consulting agency Compass Lexecon launched final month said that among the parts within the design of the EU carbon market and the MSR “induce price instability”, notably as funding funds and even exchange-traded funds (ETFs) based mostly exterior of Europe are gaining curiosity in buying and selling EU carbon allowances.
“Price instability could have harmful consequences for decarbonisation,” stated Fabien Roques, Executive Vice-President at Compass Lexecon who introduced the examine on the EURACTIV occasion.
The Compass Lexecon examine was commissioned by Poland’s vitality utility PGE, which claims that the EU’s carbon market in its present form has “hugely affected” its decarbonisation plans. Speculation available on the market “limits our capability to become ‘fully green’,” stated Wanda Buk, Vice-President for regulatory affairs at PGE, which proposes to exclude monetary gamers, notably these based mostly in tax havens exterior of Europe.
“These aren’t institutions interested in decarbonisation in Europe, but are just holding the allowances for future profits,” Buk advised the occasion, which was supported by PGE.
Measures taken in different jurisdictions to restrict the affect of monetary actors in carbon buying and selling, nonetheless, have “proven to have negative effects” by way of market liquidity, responded Fabrizio Planta, Head of division for markets and information reporting at ESMA.
In South Korea as an illustration, the ETS has skilled “a big liquidity problem” when financials have been excluded from buying and selling, stated Michael Pahle from the Potsdam Institute for Climate Research in Germany.
According to Pahle, what the EU ETS wants is extra transparency and a greater rationalization of what’s driving costs up or down.
“Some players claim they can explain price movements, others say they can’t be explained implying that they must be driven by speculation,” stated Pahle. “It is unclear who is right and who is wrong, but in a politically-created market, trust needs to come to the debate,” he stated on the occasion.
According to Compass Lexecon’s Guillaume Duquesne, there isn’t a doubt that monetary actors “are critical players” out there. The query, he stated, just isn’t a lot about their participation within the EU ETS but when there may be extreme hypothesis or not.
“For a right assessment, we first need more transparency and better monitoring, and once it is clear whether there is excessive speculation in the market or not, we can decide how best to tackle this issue,” he stated.
“Actors taking speculative positions make a small proportion of the trade, but need to think of the trends and their presence in the market is increasing … Something seems to be changing and we need to monitor and make sure we don’t intervene too late if we need to,” Duquesne argued.
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[Edited by Frédéric Simon]