More companies pile into debate about future EU carbon price
ArcelorMittal, thyssenkrupp Steel, and voestalpine became the latest companies to wade into the debate about the future of Europe’s carbon price this week.
The trio – who together produce 60% of the region’s steel – wrote to EU lawmakers warning them that the current upwards trajectory of prices under the Emissions Trading System (ETS) “risks destroying Europe’s industrial base”.
They called for a “temporary pause in ETS cost escalation” until the steel industry has an economically viable way of decarbonising, as well as the introduction of incentives for first-movers.
The letter came just days after senior EU figures met to discuss their priorities for a scheduled review of the EU ETS, which could open the door to a major overhaul of the regime.
A raft of other organisations issued their positions on the upcoming negotiations, too, with wide-ranging views.
The Corporate Leaders Group, whose members include IKEA, Volvo, Amazon, Microsoft, Coca Cola, Unilever and Google, said “the ETS should not be weakened through political interventions that reopen agreed trajectories or reduce its ambition”.
“This would undermine investment certainty, penalise first movers, slow down the deployment and scaling of innovative clean technologies and delay the transition to clean industry,” the group said in a statement.
More than 50 big institutional investors also urged the Commission not to meddle with the carbon price, and the European Banking Federation warned that “interventions that risk weakening the price signal should be avoided” and would increase the cost of green capital for companies.
On the other side of the debate, the European Roundtable on Industry and chemicals association Cefic both asked for a more generous supply of carbon allowances to keep prices down, and a tougher Carbon Border Adjustment Mechanism to stop leakage.
Another Italian industry body insisted the carbon price should be cut in half – to around €30-40 per tonne.
When it comes to governments, Germany – one a major champion of the EU ETS – has become a critic this time around, along with Poland and Italy.
“This will be a different political discussion than the ones we’ve seen on the ETS in the past,” says Ingvild Sørhus, a senior analyst at Norwegian carbon markets specialist Veyt.
In previous reviews, the focus was on strengthening the framework to ensure it’s capable of generating a meaningful carbon price, but this time round, the emphasis is on doing the opposite: keeping the price sufficiently low, so as not to hinder Europe’s industrial competitiveness.
Sørhus says that, even for those bodies defending the EU ETS, there’s an acknowledgement that it’s not perfect.
“Everyone more or less agrees that the system needs reform,” she tells Real Economy Progress.
“But the signals we’ve seen so far from European politicians are quite moderate in terms of their tone – there’s a recognition that the EU ETS is an important instrument for decarbonisation, and the EU needs to ensure it stays steady.”
Last month, the Commission gave some insight into its current thinking during a roundtable with stakeholders.
“One of the most important changes is that the linear reduction factor will be altered,” explains Lidia Tamellini, an expert on EU industrial decarbonisation for Carbon Market Watch, referring to the (currently) steadily decreasing cap on emissions that underpins the EU ETS.
“We don’t know how dramatically: it could remain linear but less steep; or it could split into different phases with different rates of reduction.”
Either way, it will essentially mean companies covered by the regime will be given free carbon allowances for longer – although they may come with more strings attached than before.
“Whatever happens, there is almost certainly going to be a stronger conditionality clause for free allowances, meaning companies will have to demonstrate that they’ve invested in their own decarbonisation in order to access free allowances in the future,” Tamellini says.
Many firms were given more allocations than they needed under previous phases of the EU ETS, and they sold the surplus. But they didn’t invest that money into cutting emissions in future phases, when the cap would be lower.
As a result, they’re under fire for claiming their emissions are becoming too expensive, and politicians want to make sure that any future concessions come with clear conditions.
There are numerous proposals for what those conditions should look like, and they will be thrashed out during negotiations.
So too will the debate about how public revenues generated by the EU ETS must be spent in the future, with a growing recognition that a greater proportion of proceeds should go to supporting the decarbonisation of national industries.
Between them, these two changes are set to drive a lot more capital into new green technologies and projects across Europe.
The EU is also expected to add permanent carbon removals into the ETS, to increase the supply of viable credits, and it may also link the system with overseas carbon markets.
The Commission has already tabled reforms to the Market Stability Reserve – the main mechanism to control supply – which would see excess allowances temporarily withdrawn, rather than permanently eliminated.
An official proposal is due on July 15th, with trialogues expected to begin in September.
The Commission is pushing for a final text to be confirmed early next year, although EU ETS negotiations have historically taken a lot longer than that.
“The big uncertainty now is the political process, because once the file is opened, everything can be changed,” says Sørhus.
That being said, she continues, “regardless of how you twist and turn, we don’t see a low-price environment for carbon going forward”.
“The system seems to be solid, despite the attacks: there’s a widespread feeling that the EU ETS is generally the right framework.”
Tamellini, on the other hand, is more wary.
“If all these provisions are introduced in an aggressive way – if the reduction cap is loosened, and free allowances are extended, and removals are added in – the resulting oversupply of allowances would drive prices down to quite concerning levels,” she says.