Carbon prices have doubled in 2018. The price increase makes it more attractive to think environmental friendly.
Comment: Per Espen Stoknes on climate quotas
New revisions of the EU Emissions trading system (EU ETS) with effect from January 2019 have contributed to more than a doubling of carbon prices in 2018.
“It’s a breakthrough for the European climate policy,“ argues Per Espen Stoknes, Associate Professor at The Center of Green Growth at BI Norwegian Business School.
Since 2005, the EU Emissions trading system has been the key tool to combat climate change and curb greenhouse gas emissions in the European Union. The EU ETS works as a cap and trade system. A cap is set on the total amount of greenhouse gases each member country can emit by installations covered by the system. Within the cap, companies receive and purchase emission allowances the can trade as needed.
So far, the system has suffered by a surplus of quotas and the carbon price has been too low to achieve the desired effect on energy-investments.
More attractive to think environmentally friendly
A revised version of the entire system with full effect from 2019 has changed some key elements, making it more expensive to pollute and more attractive to think environmentally friendly.
To increase the pace of emission cuts, the overall emission allowances will decline at an annual rate of 2.2 percent, up from the current pace of 1.74 percent. In addition, the market stability reserve, which has been established to improve the systems resilience to future shocks, has been substantially reinforced. The amount of allowances in circulation that are put in to this reserve mechanism, will double to 24 percent in the period from 2019 and 2023.
As a consequence, carbon prices have more than doubled in 2018, peaking at its highest level in ten years of 25 euros per ton in September. The price reaction is a natural consequence of tighter climate policy and stricter market mechanisms.
In total, the new market stabilization mechanism is expected to reduce the number of quotas in circulation by 40 percent next year.
While most experts foresaw a price increase, both the scale and speed have been greater than expected.
Although the revisions are a step in the right direction, prices have to become significantly higher at between 100 to 150 euros per ton in order to reach the climate target of a greenhouse gas reduction of at least 43 percent compared to 2005 levels.
Significance for Norway
About half of Norway’s greenhouse gas emissions are covered by the European emission trading system through the EEA Agreement. For that reason, large price changes potentially have major economic effects also for Norway.
The big question is how many allowances Norway can buy from EU instead of cutting emissions at home in the years toward 2030. This is referred to as EU Effort Sharing Regulation; a binding annual greenhouse gas emission target for each member state.
These days, Norwegian bureaucrats are still negotiating with the EU on how to share the burden. Norway is pushing for an agreement that allows the country to buy as many quotas as possible, assuming that this will be cheaper than cutting emissions domestically.
If the EU refuses Norway such an agreement or emission allowances becomes very expensive, this may have negative consequences beyond the 2020s.
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Text: Senior Communication Advisor, Henrik Olover Aasebøe Stølen, at BI Norwegian Business School.