The European carbon price is set to rise within the next decade, breaking its current single digit range, which led some to question the credibility of EU’s climate policy. Our new report on EU energy and climate policy states that stricter regulations, driven by the EU’s efforts to reform the European Emissions Trading System, will raise the EU carbon price to an average of €23/t in real terms between 2021 and 2030*.
EU climate and energy policy
The single most important factor for the future carbon price is the European Commission’s proposal to reform the current carbon market. In January, the Commission presented a legal proposal for a Market Stability Reserve, which is to adjust supply of permits depending on changes in demand, making carbon prices more stable.
Our analysis of the proposal suggests that such a mechanism will play a major role in supporting the future European carbon price. Without it, we see the carbon price averaging €14/t in the 2021-2030 period.
Other aspects of the future EU climate and energy policy are also significant price determining factors. The European Commission recently proposed ramping up energy efficiency policy over the next decade. In a communication on 23 July, it suggested that Europe endorse a target to cut energy use by 30 percent compared to a level projected in 2007. As Europe is currently on track for energy savings of 25 percent by 2030, the Commission is implying that the EU should impose stricter measures on electricity consumers.
The energy savings target comes in addition to previous Commission proposals for 2030 emission reduction and renewable energy targets. In a communication from January the Commission proposed the EU should reduce CO2 emissions by 40 percent compared to 1990 and reach a renewable share of final energy consumption of 27 percent by 2030. Together with the proposed energy efficiency target and the Market Stability Reserve, we estimate these targets to set the EU on a substantially lower emissions trajectory than it is currently on.
Emissions covered by the European carbon market
Assessing carbon forecasts to 2030
The price of carbon in Europe, currently at €6/t, encourages limited emission reductions, as the EU is on track to meet its climate goals for 2020. However, our analysis suggests that this is likely to change as the EU steps up its climate policy after 2020. Our forecast suggests that rising carbon prices will improve the ability of gas to compete with coal and incentivize emission reductions among European manufacturers.
We estimate the carbon price will trigger reductions of around 1.7 billion tons CO2 from now up until 2030. However, a failure of the EU to adopt the Commission proposal for a stability reserve will likely result in around half as many emission reductions, underscoring the impact of the proposal on future climate policy.
Effect of each proposed policy on EU carbon market emissions compared to current policy mix
The European carbon market is set to play a key role in EU’s future climate and energy policy. The current state of discussions in EU policy circles reflects a willingness of policy makers to use the carbon price signal as a driver of low-carbon investment decisions and a tool towards meeting EU’s climate change goals.
Track the latest European carbon policy news in real-time
Research and Forecasts, powered by Point Carbon, provides price-moving market intelligence on the power, gas and carbon markets via Eikon. This enables you to place rich research and forecast information next to real-time and historical price data, unrivaled Reuters news and community forums for an immediate holistic view of the market.
*The forecast presented here is based on Point Carbon’s base case price forecast. This forecast assumes the EU adopts a 40 percent emission reduction target, a 27 percent renewable energy target, and a 30 percent energy efficiency target for 2030, along with the Market Stability Reserve proposal by the Commission.