Carbon neutrality looms for EU Emissions Trading System

Steel plant, Metallurgical plant, Metallurgical steelmaking factory.

Our Carbon Trader, Julia Elmgren, offers her views on how the for EU Emissions Trading System is to move towards Carbon neutrality.

julia elmgren

Julia Elmgren, Carbon Trader

The EU Emissions Trading System (EU ETS) is well known for its surplus. It has been accumulating since 2009 when, as a result of the economic downturn, EU ETS emissions plunged by 200m tonnes year-on-year. Alongside this, the successful uptake of renewable power generation means the overall surplus currently sits at around 1.3bn tonnes.

Several years and negotiating rounds later, we now have the Market Stability Reserve, which has been operational since the start of 2019. This year, roughly 400mt has been removed from the auction volume, creating a real deficit in the market.

So, one might wonder why, following a tripling of prices in 2018, European Emission Allowances (EUAs) have effectively gone unchanged since December 2018?

One contributing factor to this dilemma is, of course, Brexit. The uncertainty surrounding UK installations and their trading behaviour in case of a hard Brexit has likely dissuaded some speculative traders from holding an EUA position.

And then you have gas prices. In contrast to last year, the significant reduction in gas prices has seen the profitability of running gas power plants overtake that of coal over long periods, especially this summer. With gas being roughly half as polluting as coal, it’s resulted in significant emissions reductions across the power sector.

The real question, however, is, what are industrial installations up to?

Because they mainly receive their EUAs via free allocation, they do not regularly enter the market, making them something of an unknown quantity. Critically, however, the free allocation they receive, which has historically been more than their emissions, has been reducing year on year, and is on average now below annual emissions.

Industrials have a few options to chose from. The easiest would be to simply use some of their accumulated surplus from previous years, but then they run the risk of higher EUA prices in the future. Or they could enter the market and purchase their annual deficit.

Finally, they could implement emission-reducing measures at their facility. Whether they can find profitable ways of lowering emissions with EUAs around the €25-level remains to be seen, but reports of companies taking such measures in, for example, the steel and cement industries are getting more frequent.

This, in my view, means one thing: with the pending arrival of the new President-elect of the European Commission Ursula von der Leyen, and her well-publicised Green Deal that sees EU reaching carbon neutrality by 2050, not only must more sectors be covered by a carbon price, but current caps need to be tightened too.

And if one truly believes the cap will get tightened, the industrials will accelerate their efforts in looking for ways of lowering their emissions, wary of those potentially higher future prices.

And that historic surplus? It certainly wouldn’t reach the market anytime soon.

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