EU climate plan sets stage for an ex­plo­sive rise in car­bon prices

The Daily Telegraph - Business - - Front Page - By Am­brose Evans-Pritchard

COM­MOD­ITY traders are bet­ting that Europe’s car­bon fu­tures will soon cat­a­pult higher as Brus­sels drains the glut of car­bon al­lowances on the mar­ket.

Prices are likely to smash the all-time record of €30 (£27.50) a tonne within months, pro­foundly re­shap­ing the EU’s en­ergy ar­chi­tec­ture. The killer de­tail in the Euro­pean Com­mis­sion’s 140-page climate im­pact re­port for 2030, re­leased last week, is a “one-off ” re­bas­ing of its cap-and-trade Emis­sions Trad­ing Scheme (ETS) to dry up ex­cess per­mits, fol­lowed by a faster pace of tight­en­ing from next year on­wards.

“The price will go bal­lis­tic. The only ques­tion is tim­ing,” said Law­son Steele from Beren­berg Bank. “Right now, we have a big sur­plus of per­mits be­cause Covid caused emis­sions to fall through the floor. But next year, there is go­ing to be a 30pc deficit be­cause they are only is­su­ing 600m per­mits a year.”

Bar­clays says the re­bas­ing clause has caught mar­kets by sur­prise and amounts to a new “ele­phant in the room” for Europe’s climate pol­icy. The com­mis­sion is clearly re­ly­ing on a higher car­bon price to do the heavy lift­ing as the EU tight­ens its CO2 tar­get: now a 55pc cut in emis­sions be­low 1990 lev­els this decade, ver­sus 50pc be­fore.

It is also a tacit recog­ni­tion that EU funds for in­vest­ments in re­new­ables, bat­tery stor­age, green hy­dro­gen and heat pumps are scarcer than head­line fig­ures sug­gested by the €750bn Re­cov­ery Fund. Mr Steele says the car­bon price is shift­ing to a much higher struc­tural level and spread­ing to more sec­tors. “There will be a snow­ball ef­fect. What will stop the price go­ing to in­fin­ity is a political re­ac­tion, but it could go to triple dig­its be­fore that hap­pens. Coal can rest in peace,” he said.

“I am not a fan of the car­bon scheme. It is a big, clunky bu­reau­cracy, but gov­ern­ments love it be­cause it gen­er­ates

€18bn in rev­enue each year. That is as much as the whole Brexit di­vorce bill, and it could dou­ble again.”

The com­mod­ity trad­ing firm ICIS also ex­pects prices to blow through €100 a tonne, though it might take sev­eral years. This im­plies a vi­o­lent shock to Europe’s mar­ket pric­ing mech­a­nism. In­vestors and cap­i­tal mar­kets will pull

for­ward the en­ergy switch by act­ing on the sig­nal. “The com­mis­sion thinks they can man­age this process but they have been wrong be­fore. The car­bon mar­ket could go re­ally wild,” said Phil Mac­Don­ald from en­ergy con­sul­tants Em­ber.

Car­bon fu­tures have al­ready jumped six-fold in three years af­ter Brus­sels re­vamped a bro­ken sys­tem that had been cap­tured by spe­cial in­ter­ests and be­come a by­word for mar­ket il­lit­er­acy.

It has cre­ated a Mar­ket Sta­bil­ity Re­serve that acts like a cen­tral bank, with pow­ers to dial down the per­mits. While it re­mains a cen­tralised mo­nop­oly – and gives a free pass to some bad pol­luters – it is ac­quir­ing teeth.

The re­forms turned the ETS fu­tures con­tracts into a red-hot com­mod­ity in 2018, en­rich­ing hedge funds quick to spot the im­pli­ca­tions.

Europe’s sleepy util­i­ties were forced to chase an up­ward spi­ral to cover their own needs. We may see a re­play once the pan­demic re­cedes.

Car­bon prices in the high €20s have al­ready caused a “fuel switch” from coal to gas, which emits half as much CO2. Ger­man coal con­sump­tion fell by a quar­ter last year. The next phase is po­ten­tially rev­o­lu­tion­ary.

The com­mis­sion’s plan sketches a car­bon price of €44 a tonne by 2030 un­der its mid-am­bi­tion sce­nario, al­ready high enough to ren­der Poland’s coal in­dus­try ob­so­lete and fin­ish off the cheap­est and dirt­i­est brown lig­nite in Ger­many, still be­ing dug out in huge open mines.

The new €1.5bn Dat­teln 4 coal plant, opened this year in North Rhine-West­phalia, is ef­fec­tively still­born, as are three Dutch plants built with­out car­bon cap­ture four years ago at a cost of €3bn, all bizarre ex­hibits of fi­nan­cial self­harm.

How­ever, the com­mis­sion’s “all-in” sce­nario takes car­bon prices to €65. This is clearly the di­rec­tion of travel.

Ger­many has tight­ened its own in­ter­nal car­bon price and aims for a price cor­ri­dor of €55-€65 by mid-decade.

A car­bon price much above €40 eats into the economics of nat­u­ral gas as well. Rus­sia’s Nord Stream 2 pipe­line be­comes point­less be­fore the first cu­bic litre of gas ac­tu­ally flows.

“These prices are a huge sig­nal to any­body build­ing un­sub­sidised wind farms. Gas is re­ally go­ing to strug­gle un­less car­bon cap­ture be­comes more com­pet­i­tive,” said Mr Mac­Don­ald.

The old as­sump­tion was that it would take a car­bon price above €100 to make

‘We will have a 2050 net zero tar­get writ­ten into EU law by the end of the year; that changes ev­ery­thing’

a dent in emis­sions. This has been over­taken fast by tech­nol­ogy.

Mark Lewis, sus­tain­abil­ity chief for BNP Paribas As­set Man­age­ment, says there is a scis­sor ac­tion as ris­ing car­bon prices in­ter­sect with the plum­met­ing cost of wind, so­lar and – with a lag – en­ergy stor­age. “All of a sud­den, you can see what the end game is go­ing to be,” he said.

“We will have a 2050 net-zero tar­get writ­ten into EU law by the end of the year and that changes ev­ery­thing. The car­bon price sig­nal will bring in the fi­nan­cial mar­kets and they will drive the tran­si­tion,” he added.

Mr Lewis says that once prices reach €50 to €60, the switch goes be­yond the power sec­tor and starts to open up whole swathes of trans­port, in­fra­struc­ture and in­dus­try to rapid car­bon abate­ment.

Con­sul­tants at Refini­tiv ex­pect the re­new­able share of power to dou­ble to 70pc by 2030 and (with nu­clear) al­most “wipe out” fos­sil fu­els.

Nat­u­ral gas will not play the bridg­ing role long as­sumed even for elec­tric­ity. De­mand will drop by a third to 500 ter­awatt/hours. Coun­tries will “leapfrog from coal to re­new­ables”.

The ques­tion is how quickly clean hy­dro­gen comes into play for heat­ing, or fuel cells for haulage, ship­ping and trains, or for in­dus­trial uses in steel, ce­ment, chem­i­cals and fer­tiliser pro­duc­tion. That de­pends on whether the EU de­liv­ers on the other side of the equa­tion and backs its hy­dro­gen strat­egy with real money to reach crit­i­cal scale.

Refini­tiv’s Ingvild Sorhus says the EU plan is so far just a “sneak view” of the fu­ture, frus­trat­ingly vague on de­tail.

It talks of ex­tend­ing the car­bon tar­iff to build­ings, road trans­port and in­traEU ship­ping, yet noth­ing is fleshed out.

Half of EU emis­sions are still ex­empt a full five years af­ter the Paris Agree­ment, ei­ther be­cause sec­tors are ex­cluded or be­cause they are in glob­ally traded prod­ucts and are granted car­bon al­lowances for free-to-main­tain com­pet­i­tive­ness.

What is new this time is that no coun­try can block the plan. Poland has lost its veto.

The mea­sure will be pushed through by a qual­i­fied ma­jor­ity vote. Seven­teen states have al­ready signed up.

Ul­ti­mately, the shape of the EU’s green strat­egy de­pends on how quickly it presses ahead with par­al­lel plans for a car­bon bor­der ad­just­ment tax, a dev­il­ishly com­pli­cated pol­icy to craft with­out caus­ing trade wars.

That in turn de­pends on whether Joe Bi­den is elected US pres­i­dent and wins the Se­nate.

His com­pa­ra­ble plan would open the way for a North Amer­i­can-Euro­pean bor­der tax al­liance with global political clout.

Once the bor­der tax is in place, it ends the risk of “car­bon leak­age” to dirt­ier plants abroad.

The EU car­bon scheme can then be ex­tended safely to all in­dus­tries. The price sig­nal reaches the last hold­outs.

The game is not yet over for fos­sils in Europe but the epi­taph is al­ready be­ing scratched on the wall.

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