ERCST COMMENTARY – EU carbon price: regulatory intervention, economic cycle, market fundamentals

Currently there is a bearish market in the EU ETS with carbon prices down from close to EUR 100, to the 50 range. That has raised concerns among certain stakeholders, with some feeling that this range does not provide a sufficient price signal for decarbonisation.

This Commentary aims to identify what is behind the current situation which seems at odd with the stated direction in the EU Climate Law, including the direction of the 2040 target for the EU.

The conclusion seems to be that the supply-demand balance resulting from a convergence of low industrial activity and EUA demand (which some see as cyclical but may be more structural in nature), coupled with better low carbon energy performance and more supply, was exacerbated by regulatory intervention to access funds for the REPowerEU programme. This may impact the EU ETS both in the short term as well as the long-term in terms of price signal for decarbonisation.

Some takeaways to be considered will include the elimination of ad-hoc discretionary interventions, such as the increase of EUAs in circulation for REPowerEU budget purposes, and the ex-ante integration of potential interventions in the market design; drawing lessons from the current situation for the next revision of the MSR; start the discussion on the future of the EU ETS, including discussion on the objectives of the EU ETS in the context of the constrained financial capability of the EU; and the need for a discussion on flanking measures to provide signals for investors.