Last week, at a conference organised by the French government, six EU countries discussed the possibility of introducing a minimum price to pollute. Although prices under the EU’s carbon market have lately risen above 10 Euros for the first time since 2011, they are still barely a third of what is needed to reach the Paris climate goals. Establishing a carbon floor price in Northern and Western Europe could accelerate the shift away from coal and create a tipping point for the phase-out of fossil fuels in other sectors and jurisdictions.
Why polluting is so cheap
Under the EU Emissions Trading System (EU ETS), there are more pollution permits on the market than the industry and power sectors actually need. This has been the case every year since the start of the scheme in 2005, which means that the oversupply of emission permits has been growing steadily, representing billions of greenhouse gas emissions today. This oversupply has made it too cheap to pollute, thus hampering the phase-out of fossil fuels, notably coal.
The situation is likely to improve in the future as the recently agreed reform will remove surplus emission permits from the market: this has already led to a doubling of carbon prices compared to previous years. However, this removal of the surplus will be incremental, and occur too slowly and too late to wipe out all the excess permits in the next years. As it stands, the EU carbon price will not be high enough to make fossil fuels financially unattractive, a crucial step towards limiting global warming.
How to introduce a minimum price on pollution
A minimum carbon price would avoid the current situation in which polluting is too cheap. Ideally, this happens at the European level, or otherwise at the regional or national level.
Introducing a carbon floor price at the European level, as part of the EU ETS, would mean that emission permits are only auctioned if industries are willing to pay the minimum price. If the permits are not bought for this price, they can be stamped as “unneeded” and removed from the system.
A coalition of willing countries, or an individual country, can also take the lead in introducing a minimum carbon price, without waiting for the whole of the EU to act. In 2013, the UK introduced a carbon tax for the power sector on top of the EU ETS. This contributed to a 60% decline in coal emissions in the year 2016 alone. Other countries struggling to phase out coal in their electricity systems in the next decades would be wise to draw lessons from the UK experience. Introducing a carbon floor price would incentivize electricity producers, consumers and investors to shift from fossil fuels to renewables.
With a higher price tag for pollution, government revenues from auctioning pollution permits also increase. These billions in extra revenues can and should flow back into the society to support workers and communities in the transition to carbon-free societies.
Increased political momentum to end the era of cheap pollution
Ending cheap pollution in Europe is gaining political momentum. At the One Planet Summit last December, five European countries (the UK, Germany, France, Sweden and the Netherlands) committed to a more meaningful carbon price in relevant sectors. Last year, the new Dutch government agreed to introduce a carbon floor price rising to EUR 43 per tonne of CO2 in 2030 to steer its power sector away from coal, and to establish a tax on the most polluting transport mode (flying). President Macron has been pushing for a higher carbon tax in the EU for months and France last week hosted the meeting to discuss the possibility of a regional coalition of countries introducing carbon price floors.
Eyes are now on the new German government to set a date for its coal-phase out and determine how best to deliver this, including through carbon pricing measures. Carbon pricing can play an important role in kicking out coal from the power sector, as well as in incentivising behaviour change, such as shifting from flying to more climate friendly transport modes. But for carbon prices to play this role, polluting cannot be as cheap as it is today.
Coordinating action to establish a floor price in Northern and Western Europe should be on the top of the political agenda in these countries. As last week’s meeting showed, Germany, France, the Netherlands, Sweden, Finland and the UK are well placed to lead by example and show other countries how to rapidly move away from planet heating fossil fuels.