A leading European Parliament lawmaker has warned against the potential “unintended consequences” of intervening in the EU carbon market, amid growing calls from some governments and industries to curb the activity of financial actors taking speculative positions in the EU emissions trading scheme (EU ETS).
The price of carbon allowances on the EU ETS rose by around 150% over the past year, reaching an all-time high of €98.49 per tonne in mid-February 2022.
The price rally has put the ETS under scrutiny in some EU capitals as they grapple with sky-high energy prices. Some governments, such as Poland or Spain, have demanded action to investigate the presence of financial actors, such as investment or pension funds – which may have fuelled speculation on the EU’s carbon market.
The European Commission has repeatedly downplayed those claims, saying that prices reflect the EU’s higher climate ambition. Last year, the EU set into law a target of reducing emissions at least 55% below 1990 levels by 2030 before reaching net-zero by 2050.
Similarly, a recent report from the European Securities and Markets Authority (ESMA) released at the end of March found no major abnormalities in the carbon market’s functioning, but recommended increasing transparency and monitoring in the EU ETS.
The rules underpinning the EU ETS are currently being revised to reflect the bloc’s higher climate ambition, with the carbon market expected to deliver a 61% emissions reduction by 2030 in the sectors covered compared to 2005 levels.
Swedish centre-left MEP Jytte Guteland, the lawmaker overseeing the carbon market reform for the Socialists & Democrats (S&D) group in the European Parliament, has warned against price intervention on the market.
According to Guteland, releasing allowances from the supply-absorbing Market Stability Reserve (MSR) could prompt CO2 prices to suddenly drop, and hence lower incentives for industries to decarbonise.
“We don’t want to meddle into the system and get unintended effects that would harm a market-based mechanism and its predictability on the longer term,” Guteland told a EURACTIV event.
“Even though we have had higher prices in recent years, it is not where it should be,” the Swedish MEP warned, saying a price of at least $100 was needed to provide an incentive for industries to decarbonise.
A study by consulting firm Compass Lexecon released last month stated that some of the elements in the design of the EU carbon market and the MSR “induce price instability”, particularly as investment funds and even exchange-traded funds (ETFs) based outside of Europe are gaining interest in trading EU carbon allowances.
“Price instability could have harmful consequences for decarbonisation,” said Fabien Roques, Executive Vice-President at Compass Lexecon who presented the study at the EURACTIV event.
The Compass Lexecon study was commissioned by Poland’s energy utility PGE, which claims that the EU’s carbon market in its current shape has “hugely affected” its decarbonisation plans. Speculation on the market “limits our capability to become ‘fully green’,” said Wanda Buk, Vice-President for regulatory affairs at PGE, which proposes to exclude financial players, particularly those based in tax havens outside of Europe.
“These aren’t institutions interested in decarbonisation in Europe, but are just holding the allowances for future profits,” Buk told the event, which was supported by PGE.
Measures taken in other jurisdictions to limit the influence of financial actors in carbon trading, however, have “proven to have negative effects” in terms of market liquidity, responded Fabrizio Planta, Head of department for markets and data reporting at ESMA.
In South Korea for instance, the ETS has experienced “a big liquidity problem” when financials were excluded from trading, said Michael Pahle from the Potsdam Institute for Climate Research in Germany.
According to Pahle, what the EU ETS needs is more transparency and a better explanation of what is driving prices up or down.
“Some players claim they can explain price movements, others say they can’t be explained implying that they must be driven by speculation,” said Pahle. “It is unclear who is right and who is wrong, but in a politically-created market, trust needs to come to the debate,” he said at the event.
According to Compass Lexecon’s Guillaume Duquesne, there is no doubt that financial actors “are critical players” in the market. The question, he said, is not so much about their participation in the EU ETS but if there is excessive speculation or not.
“For a right assessment, we first need more transparency and better monitoring, and once it is clear whether there is excessive speculation in the market or not, we can decide how best to tackle this issue,” he said.
“Actors taking speculative positions make a small proportion of the trade, but need to think of the trends and their presence in the market is increasing … Something seems to be changing and we need to monitor and make sure we don’t intervene too late if we need to,” Duquesne argued.
> Watch the full EURACTIV event below:
[Edited by Frédéric Simon]