Paris Agreement will push EU carbon prices to €55 per tonne by 2030 finds Carbon Tracker report

Mark Lewis’ first report for the think-tank predicts fourfold growth for EU allowances

Carbon prices in Europe will double over the next three years and could grow fourfold by 2030, according to new research by Carbon Tracker’s Mark Lewis.
In his first report for the think-tank since joining last month from Barclays where he was Head of European Utilities, Lewis claims that if the European Commission legislates to meet the EU’s commitments under the Paris Agreement, carbon allowances will reach up to €55 a tonne.
Using forecasting models based on the International Energy Agency’s Sustainable Development Scenario, and a report from the Netherlands Environment Assessment Agency, Carbon Tracker has published what it describes as “the first assessment of the impact of action to bring the world’s largest carbon market into line with the 2015 Paris Agreement” – a report titled Carbon Clampdown: Closing the gap to a Paris-compliant ET-ETS.
The report states that the EU must move to make “even the most efficient coal and lignite power plants unprofitable” if it is to steer the region towards alignment with its legally-binding climate commitments. In order to do this, it says, the EU must raise pricing through its existing Emissions Trading System (EU ETS).
Moves have already been made to create a more effective pricing model through the EU ETS, which saw the cost of carbon plummet after the financial crisis rendering the market almost irrelevant. Many years have been spent thrashing out plans at EU level for a ‘Market Stability Reserve’ – to be implemented next year – which aims to create a mechanism to remove allowances from the system when demand is low and add them in when demand is high. Already, there has been a ‘backloading’ process introduced to give short-term vigour to the system. For more details, see RI’s analysis from last year.
These moves have contributed to a more bullish market, and prices have shot up from a low of €4.38 per tonne last May to around €13 per tonne currently. Carbon Tracker predicts the MSR will lead to the removal of three gigatonnes of allowances by 2023 – equivalent to nearly two years’ worth of current emissions. The report says this reduction in supply should continue to put carbon allowances on an upward trajectory, resulting in pricing of between €25 and €30 per tonne by 2021.But the World Bank predicts that carbon prices need to surpass $80 (€65) per tonne to enable economies to align with the Paris Agreement. There was some frustration that the European Commission’s groundbreaking efforts to address climate change within financial markets – via the High Level Expert Group on Sustainable Finance and the Commission’s own Action Plan on the topic – did not give any serious airtime to the issue of carbon pricing. Some investors have called it “the elephant in the room”, while others have suggested it is being overlooked because the topic is too politically risky.
Last month, the EU Council made a formal request to the European Commission to draw up a proposal for a long-term Paris-compliant emissions strategy within a year. “This sets in train a process that could potentially lead to a cap on the number of allowances dealt on the EU ETS,” said Carbon Tracker. Yesterday, environmental and climate Ministers from France, Sweden, Germany, the Netherlands, Finland, Portugal and Luxembourg reiterated their support for the process, calling “for the development and implementation in all countries, and particularly in the European Union, of an ambitious long term strategy in line with the objectives of the Paris Agreement”.
Lewis finds that carbon prices would need to average €45-€55/tonne for a sustained period of time in order to make coal and lignite uncompetitive, and keep emissions in line with Paris targets. If these prices were achieved, it would be likely to result in a “major switch” from coal to gas in European countries such as Italy, Spain, Germany and the Netherlands, Carbon Tracker claims.
“Life is set to get much tougher for EU coal generators,” said Lewis. “Higher carbon prices will eat further into operating margins that have already been severely eroded by the growth of renewables, forcing less efficient coal plants off the grid altogether. Under a Paris-compliant EU-ETS cap, the shock to coal would be even greater, forcing all coal and lignite plants – even the most efficient – either off the grid or to the margin.”