Externalities

Ensuring a clear carbon price signal in the European economy to facilitate the transition to a low-carbon society

Opportunity

Decarbonisation of the European economy without a clear price on carbon emissions will be very difficult. The low-carbon transition is a process of at least 40 years, which has only just begun. Investments in efficiency improvements and renewable power capacity over the last decade are the tip of the iceberg. Not only does the power system need to fully decarbonise, also the European transport system, the building stock and European industry need to reduce carbon emissions by over 80 per cent. This will require high upfront investments of unprecedented scale. These investments will not be viable without a clear carbon price.

The European Union (EU) has an Emission Trading Scheme (ETS) is place. The ETS sets an explicit carbon price for large carbon emitters (energy producers and industry). Other sectors, such as transport, agriculture and buildings are covered under the EU’s Effort Sharing Decision, which sets annual carbon budgets for EU Member States and thus creates an implicit carbon price. Strengthening both mechanisms will create a more profitable business case for low-carbon producers and make high-carbon production increasingly unattractive.

Challenge

Carbon prices initially peaked in 2011 at levels above €25/tCO2 but then quickly declined to approximately €8/tCO2 in 2015. A number of ETS design flaws surfaced during Europe’s economic recession. Furthermore, lacking progress on an international climate agreement resulted in a price crash in the international carbon market. The European system, allowing for imports of carbon credits from abroad, was hit on both ends: Imported credits flooded the European carbon market, while domestic demand for credits fell as a result of the economic downturn.

The ECF has worked with its partners to improve the design of the ETS. Various fixes have been adopted but the historic oversupply is still in the system. With a major reform of the ETS on the European agenda in 2016, and support by the ambitious international climate agreement in Paris in December 2015, Europe now finds itself confronted with a unique opportunity to establish the policy framework as it was once intended and set a strong carbon price signal for investors.

Approach

The ECF engages with NGOs, think thanks and research institutes, such as Sandbag and the World Wide Fund for Nature (WWF), as well as with industry stakeholders and trade associations. We collaborate with our partners on a range of technical issues of the ETS and aspects of the Effort Sharing Decision. The ECF applies an evidence-based approach to inform the debate around a credible policy framework that can build on broad support from all stakeholders.

For more information, please contact externalities@europeanclimate.org.