Will the EU carbon market pay the price of the energy crisis?
Europeans are looking for answers to the energy crisis.
Several EU member states are proposing to revise how the carbon market works, so that it weighs less on prices.
But could this actually make a difference?
The 27 EU leaders met in Brussels yesterday, late into the night, to find solutions to the surge in energy prices caused by the war in the Middle East.
Several of them believe one solution would be to act quickly on the EU’s “polluter pays” system, known as the ETS — the Emissions Trading System. It’s often referred to as the carbon market, because companies that emit CO2 buy and sell emission allowances to gain the right to pollute.
In recent days, around ten member states — including Italy, Poland, and most countries in Eastern Europe — have called for the ETS to be revised, or even temporarily suspended, in order to reduce costs for businesses.
And in the current context, this proposal is gaining traction.
On the other side, a group of eight countries — including Sweden and Spain — are defending the current system, which they see as essential for decarbonisation.
Despite these divisions, all 27 leaders have officially asked the European Commission to propose a rapid revision of the carbon market following yesterday’s summit.
The goal: To “limit the impact of the ETS on energy prices.”
Could changes to the ETS actually bring prices down?
On average, the ETS forms around 11 percent of electricity price in the EU.
Only polluting energy sources have to pay for emission allowances. Renewable energy and nuclear power are not subject to the carbon market, because they emit little or no CO2.
But the story doesn’t end there.
Electricity prices are set by the most expensive power plant needed to meet demand — often a gas-fired plant, which produces the most expensive electricity.
This means that even electricity generated from renewables is sold at that higher price. This is known as the “price coupling” effect.
In other words, even if your electricity comes from a wind farm near your home, you still pay a high price as soon as a gas or oil power plant is used somewhere in your country to meet demand.
That being said, the cost of the ETS still represents only a small share of the final bill. Fuel prices remain the main driver. Then come refining costs, network costs, and taxes.
So that’s for electricity prices. The “polluter pays” system also covers certain industrial sectors — those that emit large amounts of CO2, such as steel, cement, and aviation.
In reality, these industries are the ones most actively calling for a revision of the ETS.
So if the ETS plays such a limited role, why is it at the top of the agenda?
For several reasons.
Even before the war in the Middle East, some EU leaders were already planning to bring the ETS back into the spotlight.
For a number of countries, the system is seen as penalising Europe’s heavy industries. Without questioning decarbonisation goals, they are calling for more flexibility.
As a result, the start of the second phase of the ETS — which is supposed to cover heating and transport — has already been delayed, and will likely be postponed again following discussions between member states.
And this is despite support measures already in place to help companies adapt.
Another factor is that, after the 2022 energy crisis, the EU has few tools left to cushion the impact of rising prices.
Focusing on the ETS allows policymakers to respond to industry concerns while showing some — albeit limited — impact on energy prices.
One other thing the EU could do is pushing for a reduction in the gas demand, through mandatory reduction objectives, as suggested by the Paris based think tank, institut Jacques Delors. this was already done in 2022 after the war in Ukraine broke out.
Now, all eyes are on the European Commission, which is expected to present its proposals in the coming months.
And until then, the hope is that the war in the Middle East will have ended — and that prices will have come down.
