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ECONOMIC REPORT
2016
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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
0
5
10
15
20
25
30
2008
2009
2010
2011
2012
2013
2014
2015
2016
EUA Spot Price (€/te CO
2
e)
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.
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The amount that must be paid for the right to emit one tonne of CO
2
into the atmosphere.