European carbon prices are running at record highs these days, and they have more room to rise, according to some analysts and traders. On the face of it, this is excellent news: the costlier that carbon emissions get, the more that businesses should be motivated to invest in cleaner sources of electricity generation. In practice, things are not as simple as this.
Earlier this year, when carbon prices started rising fast, European industrial associations called on EU authorities to set a so-called border tax for the carbon emissions generated by competitors outside the 27-member bloc.
“In the past, we did not have a significant problem with the carbon price because it was so low,” the FT quoted Axel Eggert, director-general of the European Steel Association, as saying last month. “Now, with the increasing price, we get into a real problem. One is our global competitors do not have those carbon constraints . . . the second point is it makes it much more difficult to invest in new technologies.”
That was when carbon permits were trading at around $47 per ton. Earlier this month, carbon permit prices topped $56 per ton—more than double on pre-pandemic levels—and some analysts expect the price to rise to over $100 per ton of carbon emissions before too long.
The European Emissions Trading System is quite simple. The EU sets certain carbon allowance limits for all businesses. Businesses that generate carbon dioxide emissions above these limits can buy permits to do so on the free market, while companies that are green and emission-free can sell such permits. The price spike in permits followed a revision of the EU’s emission reduction goals amid the pandemic, bringing some significant deadlines forward.
According to recent research from Germany, cited in Eurasia Review, this revision in climate targets and its effect on the Emissions Trading System could lead to the complete phasing-out of coal generation capacity in the EU by the end of the current decade.
“Once the EU translates their recently adjusted target of cutting emissions by at least 55% in 2030 in comparison to 1990 into tighter EU ETS caps, the electricity sector will see fundamental changes surprisingly soon,” one of the lead authors of the study, Robert Pietzcker from the Potsdam-Institute for Climate Impact Research (PIK), said.
“In our computer simulations of the new ambitious targets, this would mean that renewables would contribute almost three fourths of the power generation already in 2030 and we would reach zero emissions in the power sector as soon as by 2040. Once the change is initiated, it can gain speed in an unprecedented way.”
The result of these compute simulations is certainly impressive. However, there is one thing that it does not seem to have addressed: grid reliability. FT columnist John Dizzard wrote in a recent article how the spike in carbon prices had led to a parallel spike in natural gas prices and, somewhat oddly, an increase in coal-fired power generation, especially in Germany.
At the time of writing, Germany was generating about a tenth of its power from coal-fired plants and another 16 percent from nuclear power plants, according to electricityMap. Ten percent of the total is not an overwhelming amount of dirty fossil fuel power, but it is essential baseload—a concept that energy transition computer simulations regularly tend to overlook.
“Coal-fired and nuclear generation still provide a significant share of the country’s [Germany’s] power, but they are also a disproportionate share of the electric grid’s ‘stability’, or damping down disturbances in electricity flows that can be created by fluctuations in wind and solar generation,” the FT’s Dizzard noted, adding that Brussels might have done well to have considered the baseload implications of a shift to a predominantly renewable grid.
To sum up: the EU ETS is making European businesses less competitive than foreign rivals because carbon prices are soaring, and Brussels is still reluctant to impose a carbon border tax on imported goods. At the same time, planned changes to the electricity supply that these businesses use may make this electricity costlier—notice how the countries with the highest electricity prices are, with a couple of exceptions, also most of the countries with the most renewable generation capacity per electricityMap. These changes may also make it less reliable, and this can be an acute problem.
Despite these costs and supply security, EU authorities appear satisfied with where carbon prices are heading. In fact, as CNBC reported earlier this month, the man who heads the European Green Deal, Frans Timmermans, said that carbon prices need to rise much higher to ensure that the EU’s new emission reduction goals are met. Apparently, the cost at which these goals will be achieved, be it loss of competitiveness and higher prices for consumer goods when the EU is still suffering the fallout of the pandemic, does not figure into the equation at all.