Strong points

EU ETS overhaul faces uphill battle in 2022

A conflict looms over the phasing out of free quotas

Record prices raise concerns about societal impacts

Efforts to reform the EU’s emissions trading system face an uphill battle in 2022, including a proposed expansion in shipping that comes amid a looming energy cost crisis in Europe. to curb the willingness to accept stricter environmental regulations.

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EU carbon prices hit a record high of 90.75 euros / mt ($ 102.34 / mt) on December 8, prompting calls for intervention to curb what some see as a excessive financial speculation, with high carbon prices driving up costs for a wide range of industries from power generation to refining and aviation.

EU allowance prices fell to 79.38 euros / mt on December 20, showing an overall gain of 136% in 2021.

S&P Global Platts Analytics expects EUA prices to average 65.80 euros / metric tonne in 2022, compared to an average of just under 53 euros / metric tonne in 2021, according to its latest forecasts. EU ETS market outlook published on December 20.

Negotiations on the European Commission’s Fit-for-55 climate-energy package are expected to continue under the French Presidency of the Council of the EU in the first half of 2022, before moving to the Czech Republic in the second half of the year.

EC officials said there were no real divisions among member states over the primary goal of reducing CO2 emissions under the ETS by 61% by 2030 compared to the levels of 2005.

But some elements of the proposed reforms are likely to meet strong resistance, notably by expanding the system to include CO2 emissions from maritime transport; a proposal for the gradual elimination of free allowances for industrial sectors from 2026; and set up a new parallel carbon market for buildings and transport.

Coming conflict

In particular, the EC’s proposal to add shipping to the EU ETS has put regulators in the bloc on a collision course with industry.

The EC followed up on the proposal in July 2021, highlighting years of inaction by the United Nations International Maritime Organization.

But the International Chamber of Shipping, which represents over 80% of the world’s merchant fleet, said the EC proposal was not the right way to go.

“ICS believes a mandatory MBM based on global direct debits [Market Based Mechanism] is strongly preferable to any unilateral regional application of MBMs to international maritime transport, such as that proposed by the European Commission, ”the ICS said on September 6.

“A piecemeal approach to MBMs (the EU ETS will only apply to around 7.5% of global shipping emissions) will ultimately fail to reduce global emissions from international shipping to the extent required by the EU. Paris Agreement, while considerably complicating the conduct of maritime trade. “the group said.

Instead, the ICS is pushing for a global carbon tax on shipping fuels that would go into an IMO climate fund aimed at closing the price gap between conventional fuels and low-emission alternatives. of carbon such as hydrogen and ammonia.

Conflict over free allowances

The issue of free carbon quotas for industrial sectors is another major potential pitfall in the upcoming negotiations.

The end of the free allocation is important because it would for the first time expose emissions-intensive industries to the full cost of carbon allowances.

The EC wants to phase out free allowances and replace them with a carbon border adjustment mechanism that would apply a tariff on the carbon content of European imports of iron and steel, electricity, cement and carbon. ‘fertilizer.

Poland, an EU member state, broadly supported the CBAM idea, but cautioned against phasing out free allowances.

“The elimination of free allowances, and therefore the need for EU companies to buy more emission allowances, will lead to a direct increase in production costs and thus undermine the export potential due to the reduction of the price competitiveness of European products ”, Poland’s environment Minister Anna Moskwa warned on 29 November.

Higher production costs linked to the withdrawal of free quotas would increase the price of manufactured goods, she said. This could impose higher costs on economies already reeling from a global pandemic and a bitter energy price crisis linked to a shortage of natural gas in Europe in 2021.

Buildings and transport

The potential obstacles in the upcoming negotiations do not end there.

The EC’s July 2021 package included a proposal to establish a new autonomous market for CO2 emissions from buildings and transport fuels.

The new ETS aims to impose a carbon levy at the fuel distribution level from 2026 and, unlike other sectors, will not include free carbon allowances for fuel suppliers.

The European trade union group CES has warned that the proposal could trigger a backlash.

“The EC’s proposal to make workers pay the cost of the green transition by raising the price of oil and domestic energy risks creating a yellow vests-style reaction to urgent climate action,” the Minister warned. group in July, referring to France’s yellow vest. movement.

Taken together, the reforms proposed by the EC can be a litmus test of the willingness of European industry and society to adopt more ambitious climate targets and absorb the associated costs.