EU leaders to ask for deeper monitoring of carbon market

The EU’s heads of government are set to invite the bloc’s executive to improve monitoring of the EU carbon market, where a rally has sparked concerns about speculation and the effect on inflation amid an energy crisis.

Leaders on the European Council are concerned about the volatility of energy prices as the economy recovers from the pandemic, according to a draft political statement seen by Bloomberg. Carbon permits in the EU Emissions Trading System rose to a record €90.75 per tonne last week and are trading almost 150% higher this year. Power prices have also hit all-time highs.

“The European Council invites the commission to deepen the examination of the functioning of the electricity markets, as well as the monitoring of EU ETS trading, and to take any necessary initiatives,” according to the statement, which was to be adopted at a summit in Brussels on Thursday. 

The wording of the document has slightly changed from last week, when leaders considered asking the EU executive to deepen the supervision of trading and “follow up appropriately”. The final phrasing is still subject to changes, before and during the leaders’ discussion.

The EU emissions cap-and-trade programme imposes decreasing pollution limits on more than 11,000 installations owned by manufacturers, power generators and airlines. The bloc is discussing a deep reform of the market to align the programme with stricter climate targets for 2030. It involves accelerating the emissions cuts, a move that will make permits more scarce.

Steel producers, also covered by the carbon market, warned EU leaders on Thursday that “continued prohibitive energy prices coupled with skyrocketing carbon prices” threaten to undermine its decarbonisation plans. Eurofer, the industry’s association, also opposes EU plans to phase out free permits when implementing a carbon import levy, an element of the climate overhaul.

“Key European industries such as steel cannot bear all the energy and climate costs that we experience today and are likely to face also in the coming years if policymakers do not take the right decisions now,” Axel Eggert, Eurofer director-general, said in a statement. “If the transition is not sustainable, we risk that the European market will be flooded by ‘dirty’ cheap steel from third countries such as China, Russia or Indonesia.”

At the summit, EU leaders will discuss reports on trading behaviours in the Emissions Trading System and on the design of the bloc’s power market. While a group of countries led by Poland and Spain has blamed speculators for the unprecedented price spike and called to restrict market access for some investors, the EU’s market watchdog dismissed concerns over abuse. The recent surge was mostly caused by economic and political factors, the European Securities and Markets Authority said in its preliminary assessment last month.

Researchers at the Potsdam Institute for Climate Impact Research urged the EU to strengthen supervision of the carbon market to avoid distortions driven by financial investors, according to a report published on Wednesday. 

Poland Prime Minister Mateusz Morawiecki said on Wednesday he will seek changes to the carbon market, adding that the price of emissions has contributed to a spike in inflation across Europe. The growth of prices accelerated to a two-decade high in November.

“We will seek to convince our partners that reforms are very much needed,” he told reporters at a briefing.

Bloomberg News. For more articles like this please visit bloomberg.com.