The European Union reached an agreement on post-2020 carbon market reforms last week, with the aim of curbing the number of allowances in the market and so supporting the carbon price. Some analysts say these measures could result in a carbon price as high as €35/tCO2 by 2023. The EU timed the announcement to show leadership at UN climate talks in Bonn, but the deal still needs to be endorsed by member states and parliament. The EU Emissions Trading System (ETS) is a cap and trade scheme that places a declining cap on emissions from factories and power plants across the EU. Participants must submit carbon allowances equal to their emissions levels each year. Certain sectors receive some free allocation of allowances, while others must purchase their requirement at auction or from those with a surplus. A higher carbon price makes low-carbon technologies more viable as there is a value to the emissions saved. However, the design of the EU ETS has resulted in there being an excess of allowances in the market, particularly during periods of reduced economic output. Consequently, the carbon price has been too low to be a significant driver of emission reductions. In 2017 to date, the front-year has traded between €4.40/tCO2 and €7.95/tCO2, but the price needs to be significantly higher to bring about meaningful change. The proposed EU ETS reforms will double the rate at which excess allowances will be removed from the system. Amongst other measures, coal generators will not be able to access support from a new clean technology fund.
Under Brexit negotiations, UK participants face uncertainty over future inclusion in the EU ETS and how long they will remain in the scheme. In the meantime, the government is aiming to bring some short-term certainty by issuing a consultation to set an earlier 2018 compliance deadline for the UK, before an EU exit at the end of March 2019. Meanwhile, the Treasury is targeting a “total carbon price” for UK generators, with some further details for the long term expected in the November budget. Power generators pass through the cost of carbon to end consumers in the price of electricity, although this impact is reduced as the energy mix in the UK moves away from carbon-intensive coal generation and towards renewables and nuclear.
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