The future of carbon pricing

During Friends of Europe’s 14 March policy debate on the future of carbon pricing, speakers from the European Commission, member states, think tanks and industry discussed how the European Union Emissions Trading System (EU ETS) could be improved in the context of rising energy prices and geopolitical challenges.

“Whilst the EU carbon price peaked this February, it then slumped following the invasion of Ukraine and is now getting back,” said moderator and Director at Friends of Europe, Dharmendra Kanani. “It feels as if it’s all over the shop. There is no reliability or predictability about gas or energy supply, and we are looking at a precipice of huge amounts of poverty, especially amongst the most vulnerable communities.”

“We need to insist that the Green Deal is a path for independence from fossil fuels,” said Beatriz Yordi, Director for Carbon Markets and Clean Mobility at the European Commission Directorate-General for Climate Action. “Carbon pricing is a pillar on the decarbonisation path, and this path has enormous advantages for the security of supply,” she continued.

Alexandre Marty, Head of Climate and Natural Resources at EDF, said that the ETS “works quite well in the way it is structured” at present. “We mustn’t add unpredictability to this already unpredictable context,” he cautioned. “We should refrain from the temptation of intervening on the ETS market to mitigate what we see today in terms of volatility in energy prices.”

In response to a question from the floor on revenues, Peter Wittoeck, Head of Climate Change at the Belgian Federal Public Service Health, Food Chain Safety and Environment, recalled that according to the Commission’s proposal to expand the EU ETS to road transport and buildings, around 25% of the revenues should be distributed equitably among and within EU member states to the most economically vulnerable groups, via the Social Climate Fund.

He also gave the example of a Belgian proposal for each household to be provided with a lump sum generated from the carbon price, in which richer households would receive less than they pay, and poorer households would receive more.

“We must get rid of the misconception that the carbon price is a major part of the problems we are facing now,” he said, explaining that the energy crisis “boils down to spikes in gas price”.

“Nothing prevents you from dealing with the social aspects of the energy crisis using ETS revenues,” he continued. “You can still use the revenue that is being generated to compensate for the spikes in the gas price.”

Adrien Assous, Delegated Director of Sandbag, noted that a small amount of the ETS revenue currently goes to member states. “A lot of social policies can be implemented but that will depend on the amount that is remaining,” he said.

He also criticised the current system of free allocation permits, saying that they are obstacles to decarbonisation and innovation, and that they increase market volatility. For instance, green hydrogen should be more profitable than grey hydrogen with the current high gas prices. However, this is not the case as grey hydrogen benefits from free permits.

“We have a fantastic opportunity to accelerate the deployment of renewables and the electrification of the economy,” said Marty, who advocated for targets for clean mobility and energy renovation when it comes to direct electrification, as well as for enabling indirect electrification by scaling up hydrogen in the ‘hard to abate’ sectors.

“When you decarbonise, you will need more electricity,” added Assous. He explained that hydrogen will be needed for uses that cannot be electrified and said that nuclear power plants could also be an option as they are “better than oil and gas”.

In conclusion, Yordi stressed the need to accelerate the Green Deal to be able to reduce dependency to Russian energy supply. She agreed on the need to improve transparency, stressing that the Commission now proposes that 100% of ETS revenues are used for climate purposes. She also added that by implementing the proposed Carbon Border Adjustment Mechanism, the system of free allocation would be taken out.