EU carbon market ‘the first victim’ as electricity demand collapses

The fall in electricity demand was steepest in Italy, which was the first EU country to enforce confinement measures on the population. [johndal / Flickr]

Every country in Europe has seen electricity demand decrease by 2 to 7% week-on-week as coronavirus-related confinement measures were enforced, according to new research by Ember, a climate think tank. Some analysts are now calling for urgent measures to prevent the EU carbon market from collapsing.

The steepest fall occurred in Italy, the first EU country to introduce confinement measures to contain the coronavirus outbreak, Ember said in a new study, released on Monday (23 March).

Italy, Spain and probably France show twice the impact of any other country, according to Dave Jones, an electricity analyst at Ember.

UK electricity demand has been the least impacted so far, he said, due to the government’s late response to the coronavirus crisis.

“These are very significant falls in the context of electricity demand, where temperature-adjusted changes are normally small,” Jones said in emailed comments.

Demand in Italy fell 20% since March

In Italy, the fall in electricity demand reached 20% over the last two weeks. The impact of confinement measures there was visible early on, with a decrease in electricity demand already observed in the week of 2-8 March, Ember said.

And a further fall in demand is expected to happen after the Italian government announced new lockdown measures on Sunday (22 March), ordering factory closures and halting all production considered “non-essential”.

This means “even more industry and services will shut down and the impact on electricity demand could even exceed 20%,” Jones said.

There is a silver lining to this. Last week, German think-tank Agora Energiewende reported a dive in CO2 emissions related to falling electricity demand.

German industry alone is on track to emit 10 to 25 million tons less CO2 than business as usual, according to the think-tank’s projections, meaning Germany could end up reaching and even exceeding its climate target for 2020.

German CO2 emissions dive amid coronavirus slump

The COVID-19 pandemic is having a dramatic impact on Germany’s demand for electricity. According to initial projections, Germany could emit between 50 and 120 million tons less CO2 this year, meaning it could even exceed its climate target. EURACTIV Germany reports.

Carbon market “the first victim”

But the falling price of electricity is also threatening the EU carbon market, which risks becoming “the first victim” of the demand slump because of an oversupply of CO2 allowances, according to Máximo Miccinilli from the Centre on Regulation in Europe, a Brussels-based think tank.

“The EU Emissions Trading System (ETS) is certainly the most exposed climate policy instrument to the COVID-19 shock,” Miccinilli wrote in a briefing note.

“The uncertainty and instability of the system may undermine the plans to phase-out coal. It may also reduce public income from auctioning revenues and may slow down low-carbon investments,” Miccinilli said.

CO2 prices have sunk to €15.45 a tonne on Monday (23 March), down from around €23 at the beginning of March, according to data by Ember. And demand is not expected to pick up any time soon, Miccinilli said, predicting that “the CO2 price will hardly recover in 2020” because of the prolonged economic uncertainty caused by the COVID-19 pandemic.

According to Miccinilli, the European Commission must now urgently consider measures to prevent the EU carbon market from collapsing, and put new proposals on the table to stabilise the price of CO2 allowances as part of its economic response to the COVID-19.

Brussels, he argues, “should consider price corridors or, at least, carbon floors that will ensure coherence across the bloc for the entire phase four of the ETS”, which runs between 2021 and 2030.

However, the European Commission still considers it too early to debate economic recovery plans. The immediate priority continues to be the health crisis, one official told EURACTIV, saying recovery measures will be considered at a later stage, when the crisis is stabilised.

Green Deal facing delays due to coronavirus, EU admits

The European Commission is having to re-order its priorities in the face of the coronavirus crisis, with “non-essential” initiatives like the biodiversity strategy and the farm-to-fork strategy likely to be delayed by several weeks, EURACTIV understands.

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