Report: EU carbon prices could hit €40 over next five years
European Union (EU) carbon prices could more than double to €40 per tonne between 2019 and 2023, spurring the transition away from coal power across the bloc.
That is according to a new report from think-tank Carbon Tracker, which claims that carbon prices are set to rise even faster than previously anticipated, rendering the majority of the EU’s coal and lignite power plants unprofitable.
Reforms to the EU Emissions Trading System (ETS) cap-and-trade approach have already seen the price of carbon increase more than threefold from €4.38 per tonne in May 2017 to €18.28 in August 2018. By the end of the year, the price is expected to reach €25.
Carbon Tracker’s latest analysis, published today (21 August), predicts that carbon prices will average between €35 and €40 per tonne over the next five years. The report additionally estimates that prices could reach as high as €50 per tonne during the winters of 2020-2021 and 2021-2022, when gas prices are set to hit their seasonal high points.
Carbon Tracker’s lead authority on carbon markets, Mark Lewis, said that such prices would render coal plants with thermal efficiencies of 38% and below insolvent.
“Bullish as we remain about the prospect of further rises, we think prices are effectively capped around €50,” Lewis said. “At this price, a combination of fuel-switching, cheaper renewable energy, political pressure and the sale of surplus carbon allowances by speculators would limit the duration of excessive prices.”
The report additionally predicts that the EU’s Market Stability Reserve (MSR) mechanism, which will be introduced in January 2019 in a bid to address the 1.7bn tonnes of surplus carbon allowances in existence, will create a “supply squeeze” over the next five years. The mechanism will cancel 24% of the surplus each year up to 2023 and 12% thereafter.
As a result of the MSR, Carbon Tracker estimates that the EU’s power and aviation sectors will be left with a carbon deficit of around 1.4bn tonnes.
To reduce this deficit, the think tank predicts that power generators will need to bid up carbon allowance prices. It argues that this move will facilitate an internal transition from coal to gas while incentivising surplus allowances to be purchased.
Its analysis forecasts that no technology to “meaningfully” reduce the aviation sector’s emissions will emerge before 2023, leaving industry stakeholders with no option but to purchase carbon allowances.
Paying the price
Emissions trading systems are springing up in various parts of the world, such as New Zealand, South Korea and California, which is in talks with the EU to potentially create a common carbon market. Last December, China signalled its intent to address climate change with the launch of the world's largest carbon market.
Carbon pricing policies now cover between 20-25% of global greenhouse gas (GHG) emissions, according to recent research from the Institute for Climate Economics (I4CE). As of April 2018, 46 countries and 26 provinces or cities had adopted market-based carbon measures, according to I4CE.
Such policies generated revenues of $32bn in 2017, up from $22bn the previous year. But the think-tank said that prices are too low to meet the Paris Agreement targets.
More than 75% of emissions regulated by carbon pricing are covered by a price below $10 - a figure which researchers say would need to rise to between $50-$100 by 2030 to keep the world on a 2C trajectory.