Published on 05 October 2018


European carbon market: with a rise in the price, the energy transition accelerates

A new Carbon Tracker study found that European Union (EU) carbon prices could average between €35-40 per tonne over the next five years. At this rate, the EU could save around 400 million tonnes in carbon emissions over the 2019-2023 period.

With a rise in carbon prices, European greenhouse gas emissions are expected to fall significantly, according to Carbon Tracker

According to a Carbon Tracker study, the price of carbon on the European market is rising faster than expected. The think tank specialised in climate-related financial risks estimates that the price per tonne of carbon will reach €25 by the end of 2018, which is €10 more than estimates from last April. 

€40 per tonne  

This sudden change in prices anticipates an EU-wide reduction in carbon quotas (equivalent to a deficit of 1.4 billion carbon tonnes from the market) for the period 2019-2023. This mechanism was put in place by the European carbon market reform, established last February as a way to raise the prices that had fallen very low over the last few years. 

According to Carbon Tracker, the gamble will pay off. The firm's report revealed that an increase in carbon tonne pricing should indeed continue to climb to €35-40 over a five year period. Achieving such high range would, according to the report, would allow for a more rapid switch to gas fuel. This is mainly the case in Germany and Spain, and to a lesser extent, in Italy and the Netherlands. 

At the European level, emissions savings would be significant, reaching 400 million carbon tonnes between 2019-2023, or 80 million tonnes per year. This is a welcome step forward in achieving the Paris Agreement objectives. All the while, the European Commission wants to raise its own climate targets next October by enhancing the reduction of its greenhouse gas emissions to 45% by 2030 instead of 40% as originally planned. 

80 million tonnes of carbon avoided each year 

According to Mark Lewis, the lead author of the study, the price of carbon should be capped at around €50 tonne over a 2-3 year period. He warns that if such a price were to be reached more than two months in a row during this period, there would be pressure to put government-backed compensatory measures in place, particularly in Eastern Europe, and spark fuel changes or the sale of excess carbon quotas by speculators. 

"The European Union is in effect the sole supplier of carbon credits in the market, so the signal the EU has sent on supply to carbon traders is far more powerful than anything OPEC could ever send to the oil market", said Lewis to the Financial Times. 

In fact, the rise in the price per tonne is attracting the interest of several hedge funds and investment banks that are expanding their carbon trading, such as Morgan Stanley, JP Morgan and Goldman Sachs. As Nima Neelakandan, head of Morgan Stanley's carbon trading business, explains, "it seems that the European trading system is finally starting to work effectively.

Béatrice Héraud @beatriceheraud

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