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Rising CO2 prices in EU to reduce emissions, add to market uncertainty

 A lignite-fired power station is pictured on August 15, 2018 in Schwarze Pumpe, Germany.
A lignite-fired power station is pictured on August 15, 2018, in Schwarze Pumpe, Germany. Photo: Florian Gaertner/Photothek via Getty Images

Over the past year, the European Union Emission Trading Scheme (EU ETS) has acted on the market to reduce the number of available CO2 allowances in its cap-and-trade system. Initiated in 2005, it is the largest such system in the world designed for reducing greenhouse gas (GHG) emissions, whereby businesses must purchase a permit at a set price in order to emit CO2.

What's new: The ETS' recent action, along with the increase in post-recession industrial productivity, has led to more than a 320% rise in CO2 allowance price, to around 22 euros per ton. This is good news insofar as CO2 emissions will likely decrease, but might jeopardize the competitiveness of businesses worldwide.

The background: The recent steep price rise for CO2 emissions allowances comes after almost 5 years of oscillation between 4 and 8 euros per ton. These prices were well below the level required to cause the hoped-for reductions in CO2 emissions among big power plants and carbon-intensive industries. The reason for the low market price was a combination of abundant allowances, overlapping renewables and energy-efficiency policies, and the world financial crisis, which reduced productivity and consequently CO2 emissions. As a result, the EU ETS's push to reduce CO2 emissions in Europe has been somewhat depressed so far.

The big picture: GHG emissions are a worldwide problem that cannot be addressed only by local policies. Today, the multiplicity of carbon pricing schemes creates market uncertainty and may undermine the competitiveness of industrial sectors subjected to different emissions caps. Despite this, many industries are making large investments in CO2 emissions technologies, such as carbon capture and storage (CCS) (e.g., cement manufacturers in Italy) and hydrogen energy (e.g., steel plants in Sweden).

What's next: Some observers foresee a rise of up to 35–40 euros per ton of CO2 by 2023. Should this come to pass, many low-carbon technologies now available, including CCS, would become economically viable and could replace carbon-intensive processes in both the power and industrial sector.

Luca Mastropasqua is a research fellow at the Group of Energy Conversion Systems at Politecnico di Milano.

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