The EU to improve its carbon market rules despite corona – survey

The annual carbon market survey by the financial market data analyst Refinitiv shows high confidence in the European Green Deal in strengthening the EU carbon market.  

First, the 80 respondents that answered to the questions about EU policies, see the EU emissions trading system (EU ETS) as the most important tool for reducing greenhouse gas (GHG) emissions in the near future – 87% say it will have an impact (of which half expect a major impact). 

This contrasts with last year’s responses; in 2019, the respondents considered national policies to be more important. The change in perception is likely linked to, on the one hand, the focus in 2019 on national coal phase-outs. 

On the other hand, it signals that the new European Commission’s current push to strengthen EU climate policies through the European Green Deal has been well received. The EU Green Deal and the EU Climate Law will require an overhaul of the current climate policies. The importance respondents gave to the EU ETS implies that the reopening of climate change policies for negotiation has led to more confidence in those policies (including the EU ETS) actually delivering significant climate benefits. That carbon market stakeholders would so strongly support this is a strong signal that the EU ETS rules that were agreed in 2018 were insufficiently ambitious, and changes are already due. 

EU governments and institutions should take this message to heart: next year brings a new opportunity to strengthen the market by closing loopholes and ending windfall profits.

Steering ships in the EU carbon market

The survey tested which policy changes the respondents are expecting in the coming years.  Encouragingly, changes to the rules that Carbon Market Watch has been calling for and supporting are strongly supported:

  • Including maritime transport in the EU carbon market is expected by two-thirds of respondents by 2030, while only 19% think it will not happen by 2030
  • With regards to the annually allowed emissions under the EU ETS (the cap), nearly three-quarters of respondents expect the rate at which the cap falls each year to be increased
  • The respondents also expect the market stability reserve (which sucks surplus pollution permits out of the market) to be reinforced – approx 65% of respondents expect that short term rules – that increase the amount of pollution permits the reserve sucks out of the market till 2023 – will continue beyond their current expiry date.

At the same time, half of the respondents to the Refinitiv survey also expect land transport to be brought into the EU carbon market by 2030 – with just 30% saying it will not happen by 2030. 

This policy change would be problematic for a couple of reasons. First, it would translate to an insignificant price increase of around 6 cents per litre at the fuel pump. It is very unlikely that people would drive less for that reason alone. Second, there are more effective climate tools for this sector, such as vehicle CO2 standards. Including transport in the EU ETS could be used as an argument for the abolition of the existing sectoral rules.

The corona factor 

The survey was taken during the onset of the coronavirus lockdown which had an impact on the price expectations, showing that the expected cost to pollute under the EU ETS (this year and years to come) was lower after the start of the lockdown. 

One of the first impacts on EU climate policies of the corona induced lockdowns was the dramatic drop in the EU ETS price to €15/ton CO2. 

On the plus side, however, respondents remained confident that policy changes will go ahead – despite COVID19.

Bad news for global carbon markets

The survey also looked at expectations for a global agreement on international carbon trading (Article 6 of the Paris Agreement). 

Of the more than 150 respondents on this section, the majority (60%) do not expect an agreement on this before 2022. This doesn’t come as a surprise for those of us closely following these talks as governments seem to far apart when it comes to agreeing on a common position. The thorniest issues include the use of old credits under the new markets and the rules to avoid that emission reductions are used towards multiple climate commitments. 

What could be taken as an encouraging sign in this regard,  twice as many respondents expect older ‘hot air’ Kyoto credits to be cancelled, than expect them to be allowed into a new global system if and when governments reach an agreement. 

To conclude, carbon market stakeholders expect EU policymakers to strengthen the EU carbon market rules, so that the scheme will become fit to help Europe reach its climate neutrality goal. And this expectation holds, even amidst the coronavirus pandemic. 

Source: “Refinitiv Carbon Market Survey 2020, A. Nordeng et al., May 2020”.