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Suspension of EU carbon market not feasible: IETA

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Suspension of EU carbon market not feasible: IETA


Complex process could take years

No legal basis for temporary suspension

Poland seeks suspension as costs soar

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  • Frank Watson
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  • Henry Edwardes-Evans
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Carbon markets industry group the International Emissions Trading Association has dismissed suggestions that the EU Emissions Trading System should be suspended temporarily due to the energy price crisis.

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The comments follow recent statements by Poland's climate and environment minister calling for the EU carbon market to be suspended until it is reformed.

Geneva-based IETA said there was no existing legal basis for a suspension of the EU ETS, meaning it would need to be decided through co-decision by the EU member states and lawmakers as an amendment to the ETS Directive.

"Given that the Directive is translated into 27 national legislations, any changes would have to be done first at the EU level and later on implemented by Member States," said Julia Michalak, IETA's head of EU policy.

"The Directive would have to be changed by a regular co-decision process, involving the European Commission, the European Parliament and the Council. It would take about 1-2.5 years, depending on the political will to reach the agreement," she said Aug. 23.

The timescale needed for such a legislative move would therefore do little to alleviate immediate energy price costs across Europe, even if it had enough political backing to pass.

The legal obligation for companies to surrender allowances each year to match their verified CO2 emissions would also have to be lifted or suspended, and Member States would have to amend their national legislation accordingly, Michalak said.

In the EU Treaties there is no general suspension clause, allowing the EU ETS to cease to apply, and there is no clause to allow an opt-out from the carbon allowance surrender obligation, she said.

"Furthermore, in the current political context, it is difficult to imagine the EU rolling back its climate laws. On the contrary, what we see in the REpowerEU strategy is a clear goal to speed up the green transition and decarbonization efforts so the EU can become independent from Russian energy imports," Michalak said.

Poland calls for suspension

Poland's parliament passed a resolution in December 2021 calling for a suspension of the EU ETS, and the country's climate and environment minister Anna Moskwa repeated those calls earlier in August.

Surging carbon prices have added to extremely high power prices across Europe amid soaring coal and natural gas prices in 2022.

EU carbon allowance prices hit an-all-time closing high of Eur98.42/mtCO2e ($97.72/mt) Aug. 19, according to Platts assessments published by S&P Global Commodity Insights, almost double their 2021 average price of Eur53.52/mtCO2e. Prices have since eased back to Eur88.56/mtCO2e at the close Aug. 25.

Gas stocks in Europe had already been tight in 2021, driving prices higher, and the supply concerns were exacerbated by Russia's invasion of Ukraine in February 2022, threatening the security of gas supplies to Europe's industrial companies and households.

The energy price crunch has also lifted coal and power prices to record highs in 2022, raising costs for Europe's energy-intensive industries and coal-dependent states in particular.

Data from the European Environment Agency showed greenhouse gas intensity of European electricity generation at 229 grams CO2 per kWh on average in 2020.

At an EUA price of Eur90/mtCO2e, the average MWh of wholesale power includes around Eur20.61/MWh of carbon costs.

Assuming the marginal unit is a gas-fired generator emitting around 350 grams CO2/kWh, the carbon component in wholesale prices rises to Eur31.50/MWh.

Focus on fossils: Ember

UK-based energy think-tank Ember agreed that suspending the EU ETS was not on the cards.

"Europe's reliance on fossil fuels for energy, not carbon prices, is the reason why our energy bills are sky-high," said Ember's European program lead Charles Moore.

"At a time of record droughts and flooding, suspending the carbon market and the international message it sends risks de-railing global climate action with little benefit for hard-hit consumers," he said Aug. 24.

"Governments already have the tools to provide targeted support to bill-payers and should be focusing their policy efforts on accelerating the energy transition to end the European economy's exposure to fossil fuels once and for all," he said.

Cost containment mech

The EU ETS legislation currently under negotiation between the member states and parliament includes proposed revisions to Article 29a, which is a mechanism designed to calm prices in the event of an excessive and sustained increase.

It would operate if over a period of six continuous months, EUA prices averaged more than three times their average during the preceding two years.

If triggered, the mechanism would counteract high prices through various options, including bringing forward future auction volumes to increase supply in the short-term. However, the system has never been activated.

Until 2022, the exact trigger mechanisms had been left vague. Proposals are under discussion to make the Article 29a thresholds clearer as well as to make it more responsive to price changes, for example by changing the threshold to two times the average of the preceding two years instead of three times the price.

While a suspension of the entire carbon market is not widely supported, changes to Article 29a could be a workable way to deal with excessive carbon prices in future, if the reforms pass into law, according to Platts Analytics.

"From our view, changes in the threshold would likely help manage significant volatility in EUA prices into the longer term, as bearish pressure would likely increase more readily if EUAs move closer to triggering a new threshold," Platts Analytics said Aug. 23.