Economic Report 2016 - Oil & Gas UK

ECONOMIC REPORT 2016

3.3 Carbon Markets and CO 2 Emissions Phase III of the EU Emissions Trading Scheme (EU ETS) (2013-20) has beenmarked so far by a persistent large surplus of emission allowances (EUAs) and depressed EUA prices. Market demand for allowances has been curtailed by weak economic activity, rising renewables penetration and the continued auctioning of allowances by Member States. Prices began a slow recovery in 2013 as the Eurozone crisis receded to reach €8/tonne (te) CO 2 in late 2015, but the slump in energy prices in 2015-16 and the recent UK referendum vote to exit the EU have brought EUA prices back below €5/te CO 2 . Figure 7: Monthly Spot EUA (Carbon) Price

30

25

10 EUA Spot Price (€/te CO 2 e) 15 20

5

0

2008

2009

2010

2011

2012

2013

2014

2015

2016

Source: ICIS Heren, Intercontinental Exchange

Since the recession in 2008-09, ETS carbon prices 12 have not been high enough to induce switching to lower-carbon fuels or to promote the intended investment in low-carbon energy sources. The steady expansion of renewables (mainly wind, solar photovoltaics and biomass) across the EU since 2009 has been achieved through domestic subsidies and other measures, not through EU-wide carbon pricing. In the UK, the switch from coal to gas in power generation since 2013 has been accelerated through the UK’s own carbon price floor (CPF), which functions effectively as a market-related tax, not through the ETS. The CPF continues to confer a competitive advantage for gas-fired generation over coal but has now been capped at £18/te CO 2 (€22/te CO 2 ) to prevent UK wholesale electricity prices from rising further above those on the continent. The shortcomings of the ETS have prompted EU efforts to reform the market through ‘backloading’ (reducing the availability of allowances in later years) agreed in 2013 and the introduction of theMarket Stability Reserve (MSR) agreed in 2015, which will take effect in 2019. These may, as intended, raise EUA prices towards the end of Phase III but it is the current review of the EU ETS Directive, due to take effect in Phase IV (2021-30), that may be much more decisive. The EU ETS remains ostensibly the central pillar of long-termEU decarbonisation policy. Finding a balance between the interests of EU industries concerned about competitiveness and carbon leakage and the desire to deliver an effective carbon price that changes behaviour will be the delicate task of EU legislators and Member States in late 2016 and early 2017.

12 The amount that must be paid for the right to emit one tonne of CO 2

into the atmosphere.

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